Department of Commerce and Insurance March by alicejenny

VIEWS: 27 PAGES: 124

									Department of Commerce and Insurance

            March 2003
                             Arthur A. Hayes, Jr., CPA, JD, CFE
                                          Director



                                  Deborah V. Loveless, CPA
                                     Assistant Director

                                                                        Dean Agouridis, CGFM
 Diana L. Jones, CGFM                                                     Michael Huffaker
     Audit Manager                                                        In-Charge Auditors


Jennifer McClendon, CGFM
   Angela McLaughlin
     Mollie Mennell
 Lisa Williams, CGFM
  David Wright, CFE                                                            Amy Brack
    Staff Auditors                                                               Editor




                     Comptroller of the Treasury, Division of State Audit
                   1500 James K. Polk Building, Nashville, TN 37243-0264
                                        615-401-7897

    Performance audits are available on-line at www.comptroller.state.tn.us/sa/reports/index.html.
      For more information about the Comptroller of the Treasury, please visit our Web site at
                                    www.comptroller.state.tn.us.
                                    STATE OF TENNESSEE
                            COMPTROLLER OF THE TREASURY
                                           State Capitol
                                 Nashville, Tennessee 37243-0260
                                          (615) 741-2501
John G. Morgan
 Comptroller


                                        March 31, 2003


The Honorable John S. Wilder
Speaker of the Senate
The Honorable Jimmy Naifeh
Speaker of the House of Representatives
The Honorable Thelma M. Harper, Chair
Senate Committee on Government Operations
The Honorable Mike Kernell, Chair
House Committee on Government Operations
       and
Members of the General Assembly
State Capitol
Nashville, Tennessee 37243

Ladies and Gentlemen:

       Transmitted herewith is the performance audit of the Department of Commerce and
Insurance. This audit was conducted pursuant to the requirements of Section 4-29-111,
Tennessee Code Annotated, the Tennessee Governmental Entity Review Law.

       This report is intended to aid the Joint Government Operations Committee in its review to
determine whether the department should be continued, restructured, or terminated.

                                                    Sincerely,




                                                    John G. Morgan
                                                    Comptroller of the Treasury

JGM/dlj
01-081/01-084
                                            State of Tennessee

                          Audit Highlights
           Comptroller of the Treasury                                  Division of State Audit


                                     Performance Audit
                            Department of Commerce and Insurance
                                                March 2003
                                                  _________

                                            AUDIT OBJECTIVES

The objectives of the audit were to determine the department’s legislative mandate and the extent to
which it has carried out that mandate efficiently and effectively and to make recommendations that might
result in more efficient and effective operation of the department.


                                                 FINDINGS

Financial Analysis Process Policies and                       system were also raised in the June 1992
Procedures Are Applied Inconsistently                         performance audit of the Division of Insurance
The Division of Insurance conducts quarterly                  (page 36).
and annual financial analyses of insurers
domiciled in the state. Based on our review of                The Division Did Not Always Ensure That
analysis files, however, the formal and informal              Insurance Companies Met All Requirements
policies and procedures in place regarding this               Related to Deposits Held for the Protection of
process are not applied consistently in all cases.            Policyholders
The inconsistent application of policies and                  Our review of deposit-related documentation for
procedures, both formal and informal, may                     a sample of 20 insurance companies indicated
hinder the division’s ability to detect financially           that the Division of Insurance did not always
troubled insurers and/or insurers engaging in                 ensure companies met all requirements. In
unlawful and improper activities, thereby                     addition, although the division staff did
endangering the policyholders of Tennessee                    apparently perform some reviews to determine
(page 31).                                                    whether securities were acceptable, the division
                                                              did not have a formal process to ensure that
The Division Does Not Adequately Follow Up                    companies met (and continued to meet) state and
to Ensure That Companies Correct Identified                   departmental requirements, as well as the
Deficiencies                                                  requirements of their individual depository
The division’s examination of an insurance                    agreements.        Without such a process,
company may result in a list of deficiencies and              policyholders and creditors may be at greater
directives with which the company must                        risk if insurance companies experience financial
comply. The examination process is weakened,                  difficulties (page 38).
however, by the division’s lack of timely, on-site
follow-up to ensure that appropriate corrective
actions have been taken and that the company
has remedied identified problems. Concerns
about the division’s examination follow-up
The Division Should Ensure That Staff               Bomb and Arson Policies and Procedures Are
Uniformly Follow Policies and Procedures            Incomplete
When Conducting Examinations of Insurance           The Director of Bomb and Arson stated that he
Companies or Document Their Reasons for             was in the process of updating these policies and
Not Following Those Procedures                      procedures, using those of the Tennessee Bureau
Our review of examination working papers            of Investigation (TBI) as a model.              A
indicated that methods used in examination,         comparison of the section’s policies and
documentation of items and procedure steps, and     procedures with those of the TBI indicated that
the depth of examinations appear to vary            the section lacks policies addressing several
depending on the examiner in charge of a            investigative and non-investigative areas (page
particular examination. Inconsistent application    47).
of policies and procedures governing the
examination process could hinder the Division       Arson-related Training for Local Fire and
of Insurance’s ability to detect, as early as       Police Departments Needs Improvement
possible, and take appropriate and timely           Investigations involving suspected arsons are, in
regulatory action against, those insurers in        most locations in the state, handed off to state
financial trouble and/or engaging in unlawful       investigators because of lack of local expertise.
and improper activities (page 40).                  The large number of volunteer fire departments
                                                    compounds the problem of lack of investigative
The Division Has Not Been Consistent in             expertise.      Effective detection by local
Applying and Documenting Its Insurance              investigators is important, however, because the
Admission Process                                   section does not have the resources to
As part of the process for permitting an            investigate every suspicious fire in the state
insurance company to conduct business within        (page 50).
the state, division staff gather and discuss
pertinent information about the company’s           Case Files and Conversations Are Not
soundness and ability to serve Tennessee            Properly Secured
policyholders.    However, our review of            Information concerning Bomb and Arson
insurance admissions files for 12 companies         Section cases in paper files and in related
indicated that the division was not always          conversations is not secured at the central and
consistent in the information it gathered.          field offices. Information in paper files is not
Furthermore, the files provided no explanation      only unprotected from intentional and
as to why some seemingly relevant information       unintentional damage or destruction, but also is
was not obtained for some companies. The            not easily retrievable. In addition, sensitive
division also did not consistently document         conversations regarding ongoing cases are not
specific details concerning its admissions          always conducted in enclosed rooms (page 51).
decisions, such as the reasons for denials of
admission (page 42).                                The Majority of Fire Departments Do Not
                                                    Report Fire Incident Data to the Tennessee
Training and Certification of Bomb and              Fire Incident Reporting System, and the
Arson Special Agents Need Improvement               Division Has No Authority to Enforce Such
We identified two basic weaknesses in special       Reporting
agents’ preparedness to handle their duties         As of September 2001, only a third of
investigating arson and bombings: 1) the lack of    Tennessee’s 663 fire departments reported fire
regular annual training relating to Peace Officer   incident data to the Tennessee Fire Incident
Standards and Training (POST), and 2) the lack      Reporting System (TFIRS). Tennessee Code
of supervisory-related training (page 45).          Annotated does not specifically require fire
                                                    departments to report data to TFIRS, and the
                                                    Division of Fire Prevention has no authority to
                                                    force fire departments to report. Reporting of
                                                    fire incident data is important, however, because
it can help the division identify departments or     Some Codes Enforcement and Deputy
areas needing additional training, technical         Electrical Inspectors’ Personnel Files Lack
assistance, and fire prevention education. In        Necessary Documentation
addition, some federal fire prevention grants to     Some of the personnel files reviewed lacked
Tennessee could be negatively impacted if fires      information such as (1) documentation showing
are underreported (page 53).                         that those persons meet the minimum
                                                     qualifications     required      for   their   job
The Department Needs to Implement a                  classification; (2) a state application—applicable
Formal, Comprehensive Fire-Prevention                for Codes Enforcement personnel only; and/or
Education Program                                    (3) an annual evaluation. The lack of such
Staff indicated that education efforts are           documentation could indicate the existence of
informal in nature and included activities such as   employees (state or contract) who do not have
occasionally providing fire-prevention education     adequate qualifications to perform their jobs, as
in schools, referring requests for such education    well as a failure by management to adequately
to local fire departments, and, if requested,        oversee the hiring, performance, and training of
providing brochures on fire prevention. An           employees (page 63).
August 2002 edition of the U.S. Fire Death
Patterns by State indicated that Tennessee’s         The Majority of Manufactured Houses Are
1995-99 average fire death rate per million was      Being Set Up Without the Required
26.5, the third highest nationally (page 58).        Anchoring Permits and Inspections
                                                     Manufactured homes that have not been
The Electrical Inspection Section Does Not           properly anchored may pose a threat to the
Periodically Review the Competency of the 20         homes’ occupants and/or persons living nearby.
Cities/Counties Granted Exemption from               In 1976, the General Assembly passed
State Electrical Inspections                         legislation requiring that manufactured homes be
By law, the State Fire Marshal may authorize         anchored by an installer approved by the State
municipalities to perform their own electrical       Fire Marshal and be inspected for compliance
inspections and, thereby, be exempt from the         with standards set by the department.
state inspections. Twenty entities are exempt        Legislation passed in 1981 added a requirement
and have held these exemptions since at least        that the installer apply for a permit prior to
1984.     The Electrical Inspection Section,         installing a stabilizing system. Despite these
however, does not periodically review the            requirements, which have been in place for 20 or
exempt entities’ operations to ensure that their     more years, our review indicated that few
standards and their inspection programs are          installation permits are being issued and few
adequate (page 60).                                  inspections are being conducted. As a result, the
                                                     department has no assurance that manufactured
The Codes Enforcement Section Is Not                 houses have been installed properly, by licensed
Performing the Required Audits of the Local          individuals, and in compliance with standards
Governments Granted Exemptions from                  (page 64).
State Building and Fire Codes
By law, local governments can request, and           The Division of TennCare Oversight Needs to
receive, an exemption from statewide building        Establish Formal Policies for Conducting
construction safety standards if they certify in     Operations
writing that they have adopted certain building      The division’s policy manual, which includes
codes and are adequately enforcing those codes.      guidance for performing general office duties
The Codes Enforcement Section is not, however,       (e.g., locating documents) as well as for
auditing the records and transactions of these       addressing technical matters (e.g., taking
local governments to ensure that they are            complaints from providers or corresponding
adequately performing their enforcement              with MCOs), is a compilation of memos and e-
functions, as required by statute (page 61).         mails issued by division management. These
                                                     memos and e-mails often refer to staff members
by name (instead of job title) and are casual in                     Furthermore, most of the memos and e-mails do
tone. While the policies address situations as                       not include the date on which the policy goes
they arise, it is difficult to determine if a policy                 into effect (page 66).
rescinds or updates a previous policy.


                                          OBSERVATIONS AND COMMENTS

The audit also discusses the following issues: (1) Division of Insurance staffing issues; (2) department
actions in response to Gramm-Leach-Bliley; (3) the lack of periodic routine examinations of investment
advisers; (4) the lack of building codes for one- and two-family dwellings; (5) the status of a polygraph
examiner for the Bomb and Arson Section; (6) the need for Bomb and Arson staff to become Certified
Fire Investigators; (7) the department’s lack of authority to oversee fire departments; (8) AIMS 2000; (9)
the Emergency Communication Board and access to 911 services; (10) the need for coordination among
several agencies in overseeing and monitoring the TennCare Program; (11) the TennCare Oversight
Division’s actions to identify and address the MCOs’ and BHOs’ financial problems; and (12) the
TennCare Oversight Division’s efforts to enforce compliance with claims processing requirements (pages
5-31).


                                   ISSUES FOR LEGISLATIVE CONSIDERATION

The General Assembly may wish to consider a formal definition of “fire department,” which would
include training and background-screening requirements for firefighters and would delineate between
full-time and volunteer fire departments. The General Assembly may also wish to consider giving the
Department of Commerce and Insurance authority to intervene when problems arise that threaten fire
service in a particular locality (page 70).

The General Assembly may wish to clarify language in Section 68-102-111, Tennessee Code Annotated,
to require fire departments to report fire incident data to TFIRS at least annually (page 70).




“Audit Highlights” is a summary of the audit report. To obtain the complete audit report, which contains all findings,
recommendations, and management comments please contact

                                 Comptroller of the Treasury, Division of State Audit
                               1500 James K. Polk Building, Nashville, TN 37243-0264
                                                    615-401-7897
                 Performance audits are available on-line at www.comptroller.state.tn.us/sa/reports/index.html.
                   For more information about the Comptroller of the Treasury, please visit our Web site at
                                                 www.comptroller.state.tn.us


.
                              Performance Audit
                     Department of Commerce and Insurance

                                      TABLE OF CONTENTS


                                                                                         Page

INTRODUCTION                                                                              1
Purpose and Authority for the Audit                                                       1
Objectives of the Audit                                                                   1
Scope and Methodology of the Audit                                                        1
Organization and Responsibilities                                                         2

OBSERVATIONS AND COMMENTS                                                                 5
Division of Insurance
    Division of Insurance Staffing Issues                                                 5
    Department Actions in Response to Gramm-Leach-Bliley                                  7
Division of Securities
    The Division Does Not Conduct Periodic Routine Examinations of Investment Advisers    8
Division of Fire Prevention
    Lack of Building Codes for One-and Two-Family Dwellings                               9
    Status of a Polygraph Examiner for the Bomb and Arson Section                        10
    Need for Bomb and Arson Staff to Become Certified Fire Investigators                 11
    The Department Does Not Have the Authority to Oversee Fire Departments               11
    AIMS 2000                                                                            13
Emergency Communications Board
    The Emergency Communications Board and Access to 911 Services                        13
TennCare Oversight Division
    Effective Oversight and Monitoring of the TennCare Program Require Coordination
    Among Several State Agencies                                                         17
    Analysis of the TennCare Oversight Division’s Actions to Identify and Address the
    MCOs’ and BHOs’ Financial Problems                                                   22
    Analysis of the TennCare Oversight Division’s Efforts to Enforce Compliance with
    Claims Processing Requirements                                                       26
                                  TABLE OF CONTENTS (Cont.)


                                                                                              Page

FINDINGS AND RECOMMENDATIONS                                                                  31

Division of Insurance
1. Financial analysis process policies and procedures are applied inconsistently              31
2. The division does not adequately follow up to ensure that companies correct
   identified deficiencies                                                                    36
3. The division did not always ensure that insurance companies met all requirements
   related to deposits held for the protection of policyholders                               38
4. The division should ensure that staff uniformly follow policies and procedures when
   conducting examinations of insurance companies or document their reasons for not
   following those procedures                                                                 40
5. The division has not been consistent in applying and documenting its insurance
   admissions process                                                                         42


Division of Fire Prevention
6. Training and certification of Bomb and Arson special agents need improvement               45
7. Bomb and Arson policies and procedures are incomplete                                      47
8. Arson-related training for local fire and police departments needs improvement             50
9. Case files and conversations are not properly secured                                      51
10. The majority of fire departments do not report fire incident data to the Tennessee Fire
    Incident Reporting System, and the division has no authority to enforce such reporting    53
11. The department needs to implement a formal, comprehensive fire-prevention education
    program                                                                                   58
12. The Electrical Inspection Section does not periodically review the competency of the
    20 cities/counties granted exemption from state electrical inspections                    60
13. The Codes Enforcement Section is not performing the required audits of the local
    governments granted exemptions from state building and fire codes                         61
14. Some Codes Enforcement and Deputy Electrical Inspectors’ personnel files lack
    necessary documentation                                                                   63
15. The majority of manufactured houses are being set up without the required anchoring
    permits and inspections                                                                   64
                                 TABLE OF CONTENTS (Cont.)


                                                                                       Page

TennCare Oversight Division
16. The Division of TennCare Oversight needs to establish formal policies for
    conducting operations                                                               66

RESULTS OF ADDITIONAL AUDIT WORK PERFORMED                                              67
Division of Consumer Affairs                                                            67
Consumer Insurance Services                                                             68

RECOMMENDATIONS
Legislative                                                                             70
Administrative                                                                          70
Future Consideration                                                                    72

APPENDICES                                                                              73
Title VI Information                                                                    73
Fire Department Participation in the Tennessee Fire Incident Reporting System           78
Summary of Findings from Recent MCO/BHO Examinations                                    90
Summary of Regulatory Actions for Xantus                                                99
Summary of Regulatory Actions for Access Med Plus/Tennessee Coordinated Care Network   107
Results of Prompt Pay Analyses of MCOs/BHOs                                            110
                               Performance Audit
                      Department of Commerce and Insurance


                                      INTRODUCTION



PURPOSE AND AUTHORITY FOR THE AUDIT

       This performance audit of the Department of Commerce and Insurance was conducted
pursuant to the Tennessee Governmental Entity Review Law, Tennessee Code Annotated, Title
4, Chapter 29. Under Section 4-29-223, the department was scheduled to terminate June 30,
2002. As provided for in Section 4-29-115, however, the department will continue through June
30, 2003, for review by the designated legislative committee. The Comptroller of the Treasury is
authorized under Section 4-29-111 to conduct a limited program review of the department and to
report to the Joint Government Operations Committee of the General Assembly. The
performance audit is intended to aid the committee in determining whether the department
should be continued, restructured, or terminated.


OBJECTIVES OF THE AUDIT
       The objectives of the audit were

       1. to determine the authority and responsibility mandated to the department by the
          General Assembly,

       2. to determine the extent to which the department has met its legislative mandate,

       3. to evaluate the efficiency and effectiveness of the department’s activities and
          programs, and

       4. to recommend possible alternatives for legislative or administrative action that may
          result in more efficient and effective operation of the department.


SCOPE AND METHODOLOGY OF THE AUDIT

       Certain activities and procedures of the Department of Commerce and Insurance were
reviewed, with a focus on fiscal years 2001 and 2002. The audit was conducted in accordance
with government auditing standards generally accepted in the United States of America and
included



                                               1
       1. review of applicable legislation, executive orders, and department rules, policies, and
          procedures;

       2. examination of the department’s records, reports, information summaries, and
          Internet homepage;

       3. a review of performance and financial and compliance audit reports on the
          department, as well as such reports from other states and the federal government;

       4. interviews with division personnel; and

       5. analysis of information obtained from other states, the federal government, and state
          and national organizations.

       This audit does not include a review of the Division of Regulatory Boards. A
performance audit of 14 of the professional regulatory boards was released in February 1999.


ORGANIZATION AND RESPONSIBILITIES

        The State of Tennessee has regulated the insurance industry since at least 1873. The
Department of Insurance and Banking was created in 1913. In 1971, the department split into
the Department of Banking and the Department of Insurance, and in 1983 the Department of
Insurance became the Department of Commerce and Insurance. The department’s primary
responsibilities are to enforce the insurance laws of the state; to supervise life, fire, casualty, and
other insurance companies authorized to transact business in Tennessee; to initiate statewide fire
prevention programs; to investigate the origin and circumstances of fires; to enforce the
Consumer Protection Act; to receive, investigate, and resolve consumer complaints; to enforce
state laws pertaining to securities dealers and salesmen; and to supervise occupational regulatory
boards, commissions, and advisory committees.

        As of June 30, 2002, the department had 612 full-time staff positions (543 filled), 131
part-time staff positions (127 filled), and one seasonal staff position (vacant). The department’s
expenditures for the year ended June 30, 2002 totaled $55,714,200—$33,316,600 from state
appropriations, $271,000 from the federal government, and $22,126,600 from other revenue
sources.

       The department is organized into eight major functional areas: administrative services,
insurance regulation, regulation of securities, consumer affairs, TennCare oversight, regulation
of trades and professions, emergency communications, and fire prevention and investigation.
(See page 3 for an organization chart of the department.)




                                                  2
                                                                        Department of Commerce and Insurance
                                                                                Organizational Chart
                                                                                   December 2002

                                                                                          Commissioner




                               Acting Deputy Commissioner
                                 for TennCare Oversight                                                                                                                  Deputy Commissioner



                              Acting Assistant Commissioner
                                  for TennCare Oversight




                                           General Counsel
            Communications
               Director
                                                                                                           Director for           Internal Audit       Fiscal Director         Director of
                                                             Assistant to Commissioner/                    Information               Director                                  Personnel
                                                                 Legislative Liasion                         Systems

        Public Information Officer

                                                               Legislative Coordiantor


          Press Office Assistant




Assistant Commissioner               Acting Assistant               Assitant                 Assistant                      Assistant              Consumer                     Emergency
   for Administration                Commissioner for            Commissioner             Commissioner                    Commissioner              Affairs                   Communications
                                      Fire Prevention            for Securities           for Regulatory                  for Insurance             Director                   Board Director
                                                                                              Boards




                                                                                               3
        The Administration Division’s services include the office of the commissioner, fiscal
services, management information services, personnel, legal services, and audit consulting and
oversight. The division is responsible for coordinating the activities of all divisions, boards, and
commissions that are part of the department. The division also supervises personnel, fiscal, and
data processing functions for the department.

       The Division of Insurance is responsible for enforcing the state’s insurance laws and
supervising more than 1,600 insurance companies authorized to do business in Tennessee.

        The Division of Securities is responsible for enforcing all state laws pertaining to
securities dealers and sellers and protecting Tennessee’s investors by maintaining the integrity of
the securities market.

        The Division of Consumer Affairs is responsible for enforcing the Tennessee Consumer
Protection Act, which protects consumers and legitimate business enterprises from those who
engage in unfair or deceptive trade practices. The division also promotes fair consumer practices
and consumer education and regulates health clubs.
        .
        The TennCare Oversight Division provides financial and operational oversight of the ten
managed care organizations (MCOs) and two behavioral health organizations (BHOs)
participating in the TennCare Program. By overseeing, examining, and monitoring the MCOs
and BHOs under contract with the state, the division determines compliance with statutory and
contractual requirements relating to MCO/BHO financial responsibility, stability, and integrity.
The division also determines MCO/BHO compliance with requirements for accurate and timely
processing of claims.

        The Division of Regulatory Boards provides licensing, regulation, and disciplinary action
of professions and businesses. The following professions and businesses are overseen by the
division: cosmetologists; funeral directors and embalmers; land surveyors; engineers; private
investigators; polygraph examiners; real estate agents and brokers; accountants; auctioneers;
alarm system contractors; interior designers; pharmacists and pharmacies; barbers; contractors;
automotive manufacturers, dealers, and salesmen; collection services; burial services; home
improvement; real estate appraisers; boxing and auto racing; private protective services;
geologists; architects and landscape architects; and employee leasing.

         The Emergency Communications Board promotes statewide wireless enhanced 911
service. The board is empowered to provide advisory technical assistance to emergency
communications districts; establish technical operating standards for emergency communications
districts; review and revise wireless 911 standards; and review and approve reimbursements for
expenditures related to implementation, operations, maintenance, or improvements to statewide
wireless enhanced 911 service.

        The Division of Fire Prevention provides services to promote fire safety education and
fire prevention. These efforts include inspection of institutional facilities and electrical
installations; arson investigation; construction plans review; the Tennessee Fire Incident



                                                 4
Reporting System; registration of electricians; fireworks and explosives user permitting;
licensing and regulating sprinkler contractors, liquid petroleum gas distributors, and fire
extinguisher dealers; and regulation of the mobile home industry. The division is also
responsible for enforcing building and safety codes for most new construction, schools, and other
existing structures.



                            OBSERVATIONS AND COMMENTS



       The issues discussed below did not warrant findings but are included in this report
because of their effect or potential effect on the operations of the department and on the citizens
of Tennessee.


DIVISION OF INSURANCE STAFFING ISSUES

        The Division of Insurance needs a sufficient number of qualified examiners and financial
analysts to effectively review and examine all domestic insurers in compliance with statutory
requirements and National Association of Insurance Commissioners (NAIC) standards. As of
December 2001, the division employed 14 full-time examiners and six financial analysts, and
also used the services of three contract examiners. At this staffing level, the division has been
able to meet the statutory requirement to examine every five years each insurance company
licensed in the state. In addition, with one brief exception (see below), the division has been
judged by the NAIC to have sufficiently met the NAIC standards necessary for accreditation.
According to Financial Analysis Section management, however, in order to meet the NAIC
standards financial analysts have had to work significant amounts of overtime following the
receipt of the companies’ annual statements. Management anticipates that the need for such
overtime will decrease, and eventually may be eliminated, once the additional staff added (see
page 6) have been fully trained.

       The division bases its regulatory processes and reviews of insurance companies on the
standards set by the National Association of Insurance Commissioners (NAIC). The NAIC
standards for regulatory processes have resulted in format standardization of both the financial
analysis and examination processes nationwide. The NAIC is responsible for accrediting
insurance departments as to their adherence to NAIC standards, as well as periodically reviewing
the accreditation of each state. On-site accreditation reviews are performed every five years
unless major problems are identified in the interim.

       The NAIC suspended the accreditation of the Division of Insurance in March 2000, in the
aftermath of the incident involving the Franklin American Life Insurance Company. In July
2000, the Division of State Audit issued a special report on this incident entitled Review of
Inaction on the Part of Insurance Division Employees Involved in the Regulation of Franklin
American Life Insurance Company. The NAIC review team concluded that there may have been


                                                5
a serious failing in the regulatory duties and responsibilities of the Insurance Division with
regard to one of the companies reviewed by the NAIC team. Problems were identified in several
key areas including communication of relevant information to/from financial analysis staff,
appropriate supervisory review, appropriate depth of review, documentation of analysis
procedures, and timely action in response to material adverse findings.

        In the review by the NAIC accreditation team in September 2000, the Tennessee
regulatory program was found to be in compliance with standards established by the NAIC.
Based on this review, the team recommended that the Insurance Division of the Tennessee
Department of Commerce and Insurance regain its accreditation. The review team did make
additional comments, however, recommending that, after a financial analysis of an insurance
company is complete, the analyst prepare a narrative summary addressing the insurer’s overall
financial condition and operating environment, including a discussion of the insurer’s strengths
and weaknesses. It was also noted that the supervisory review program had been “stretched to
the point” where it was difficult to ensure that the review of all analyses were timely, thorough,
in-depth, and challenging.

        The NAIC requires the Division of Insurance to have the resources to effectively review
the financial condition of all domestic insurers on a periodic basis, in a manner commensurate
with the financial strength and position of each insurer. The NAIC also looks to see if resources
are available to complete targeted examinations when needed. During the most recent
accreditation review, the NAIC recommended that examinations be conducted more frequently
than the five-year statutory mandate, if resources are available. According to Examination
Section management, however, at the current level of resources, examiners are able to perform
only the statutorily mandated examinations.

        According to division management, the NAIC’s general guidance is that there should be
no more than 15 to 20 companies assigned to each financial analyst. In our review of the
Financial Analysis Section, we determined that two of the six financial analysts employed by the
Division of Insurance as of December 2001 were assigned more companies in the annual audit
process than suggested by NAIC guidelines. For the quarterly audit process, it appeared that the
number of companies assigned per analyst fell within the range suggested by NAIC guidelines.
However, two of the analysts were responsible for performing supervisory reviews of other
analysts’ audits in addition to conducting the audits of their own assigned companies. As a result
of these added responsibilities, the workload of one of those analysts rose above the upper limit
recommended by the NAIC guidelines, and the workload of the other analyst increased toward
the upper end of the range specified. (This stretching of the supervisory review program was an
issue noted in the most recent NAIC accreditation review.)

       Following the Franklin American insurance scandal and the subsequent loss of NAIC
accreditation, the Division of Insurance received additional examiner and analyst positions. As
of December 2002, the Financial Analysis Section has 14 analyst positions, with no vacancies,
and the Examinations Section has 18 full-time field examiners, 4 vacant positions, and 3 contract
examiners.




                                                6
       Qualifications of staff are also an accreditation issue. Insurance companies that are
licensed in more than one state are subject to zone examinations. The NAIC requires the
examiner in charge of a zone examination to be a Certified Financial Examiner (CFE). If a zone
examination is not conducted by a CFE, insurance regulators in other states are unable to accept
the examination report. Of the 18 full-time examiners (excluding the Chief Examiner) employed
by the Division of Insurance in December 2002, only six had their CFE certifications. Based on
our survey of Division of Insurance staff, they believe that the incentives the division offers for
obtaining the CFE certification, as well as other certifications, are inadequate.

        Division of Insurance management should continue to monitor the workloads and
qualifications of examination and financial analysis staff to ensure that sufficient staff are
available and are allocated in such a manner as to ensure timely identification of troubled
insurance companies.


DEPARTMENT ACTIONS IN RESPONSE TO GRAMM-LEACH-BLILEY

        The federal Gramm-Leach-Bliley Act of 1999 was passed to “enhance competition in the
financial services industry by providing a prudential framework for the affiliation of banks,
securities firms, insurance companies, and other financial service providers.” In response to the
provisions of the act, the National Association of Insurance Commissioners (NAIC) and its
member states (including Tennessee) have taken a variety of actions related to promoting
uniformity and cooperation among regulators and safeguarding customer information.

Promoting Uniformity and Cooperation

        Under pressure from the insurance industry and the Gramm-Leach-Bliley Act and in
order to improve the standards regarding the financial analysis and examination processes, the
NAIC has undertaken an agenda of initiatives intended to streamline and promote uniformity at
the state level. Tennessee has implemented several of these initiatives. In order to comply with
the NAIC initiative promoting the national treatment of companies, Tennessee is now using the
Uniform Certificate of Authority Application for insurance companies applying for admission to
transact business within the state. Also, the Division of Insurance has entered into information-
sharing agreements with the U.S. Department of the Treasury’s Office of Thrift Supervision, the
U.S. Office of the Comptroller of the Treasury, the Federal Deposit Insurance Corporation, and
the Federal Reserve in order to facilitate communication and coordination between regulators.
Tennessee, in an effort to achieve compliance with the NAIC initiative regarding producer
licensing reciprocity and uniformity, submitted its regulations regarding producer licensing for
NAIC review. The NAIC review detailed the deficiencies with the current regulations in
reference to NAIC standards. Based on these recommendations, the Department of Commerce
and Insurance submitted a proposal to the General Assembly to bring Tennessee regulations into
compliance. Legislation based on the NAIC model regarding producer licensing and reciprocity
was passed (with amendment) during the 2002 legislative session, which should make Tennessee
regulations Gramm-Leach-Bliley compliant with regard to reciprocity.




                                                7
Safeguarding Customer Information

        Title V of the Gramm-Leach-Bliley Act states that “each agency or authority . . . shall
establish appropriate safeguards for the financial institutions subject to their jurisdiction . . . (1)
to insure the security and confidentiality of customer records and information; (2) to protect
against any anticipated threats or hazards; and (3) to protect against unauthorized access to or use
of such records or information which could result in substantial harm or inconvenience to any
customer.” Further, Section 502(b) of the law requires that “a financial institution may not
disclose nonpublic personal information to a nonaffiliated third party unless the consumer agrees
and is given an explanation of how to exercise their choice not to allow such a disclosure.”

        In 2001, the General Assembly passed legislation to direct the Department of Commerce
and Insurance in its regulation of insurance companies under the Gramm-Leach-Bliley Act.
Chapter 107 of the Public Acts of 2001 declared that disclosure by an insurer of nonpublic
personal information in violation of the Gramm-Leach-Bliley Act was to be viewed as “an unfair
or deceptive act or practice.” Furthermore, the legislation grants the Commissioner of the
Department of Commerce and Insurance the authority to implement rules and regulations
concerning the disclosure and the use of consumers’ nonpublic personal information. An
emergency rule, based upon the model rule put forth by the NAIC, was immediately put into
place. The emergency rule was replaced with another rule (also based on a NAIC model rule),
effective November 13, 2001.

        The Division of Insurance is also participating in the NAIC survey to determine what
steps companies are taking to meet the privacy restrictions required by Gramm-Leach-Bliley.
The division sent a letter to all Tennessee domestic insurance companies providing a notice of
the rulemaking and directing all companies to participate in the survey. Once the NAIC receives
all the surveys and analyzes the results, it is going to report to all the state insurance regulatory
divisions on how insurance companies in their respective states are doing. At the time of our
fieldwork, it had not yet been determined whether the NAIC would continue to use the survey to
determine insurance companies’ compliance with the Gramm-Leach-Bliley privacy restrictions.
Division staff stated that, in addition to using the survey, the division is working on the
development of procedures (e.g., as part of the examination process) to ensure that insurance
companies are complying with the privacy restrictions.


THE DIVISION DOES NOT CONDUCT PERIODIC ROUTINE EXAMINATIONS OF
INVESTMENT ADVISERS

        Section 48-2-111, Tennessee Code Annotated, states that all records of registered broker-
dealers and investment advisers are subject “at any time and from time to time to such reasonable
periodic, special, or other examinations . . . by representatives of the commissioner, as the
commissioner deems necessary or appropriate in the public interest or for the protection of
investors.” Currently, the Division of Securities conducts examinations when an alleged
problem has been reported, but does not conduct routine examinations. According to staff, the
division stopped conducting such examinations in the late 1980s because of limited resources.
Routine examinations of broker-dealers and larger-scale investment advisers are conducted by



                                                  8
other entities, but no one appears to be conducting examinations of smaller-scale investment
advisers.

        The National Association of Securities Dealers (NASD) performs both routine and for-
cause examinations of broker-dealers, and the federal Securities and Exchange Commission
(SEC) is responsible for conducting for-cause as well as routine examinations of investment
advisers. The federal National Securities Markets Improvement Act (NSMIA) of 1996 specifies
that the SEC is responsible for regulating investment advisers who manage $25 million or more,
while states are responsible for regulating investment advisers who manage less than $25
million. The act does not, however, specifically require states to examine the transactional
behavior of those investment advisers. Currently, investment advisers in Tennessee who manage
less than $25 million are not being examined periodically, unless possible problems have been
reported.

        Division of Securities staff stated that they would like to once again initiate routine
examinations of investment advisers as well as broker-dealers. The division has five staff
members in the broker-dealer section and five full-time investigators who handle enforcement
duties. According to staff, one additional examiner, to be placed in the broker-dealer section in
2004, could be allocated to allow routine examinations. Historically, routine examinations were
conducted by the broker-dealer section.

        It appears that surrounding states with similar or even smaller staffs conduct routine
examinations. For example, officials from the Alabama Securities Commission report that
despite the small size of their staff, they conduct routine examinations of investment advisers in
their state. They reported that their six staff members split their time between conducting
examinations and performing other responsibilities. Similarly, officials from the North Carolina
Secretary of State’s Office reported that they conduct routine examinations of investment
advisers. They stated that although they only have two examiners, they annually conduct 120
routine examinations. Moreover, each of the states contacted as well as a representative of the
SEC indicated that routine examinations are important to ensure the public’s protection and
reduce the potential for abuse in the securities sector.


LACK OF BUILDING CODES FOR ONE- AND TWO-FAMILY DWELLINGS

        Tennessee was among 20 states that did not have statewide building codes for one- and
two-family dwellings as of October 2002. (Two other states had adopted statewide residential
codes, but limited them to state-funded residential housing or rental homes/duplexes.) Local
jurisdictions may have imposed such building codes, but according to the Director of Codes
Enforcement, only about half of Tennessee’s counties have done so. In the last few years, the
Federal Emergency Management Agency (FEMA) and the insurance industry have begun to
promote the positive impact of building codes. They are not only promoting the strengthening of
building codes, but they are also encouraging the establishment of building codes for one- and
two-family dwellings as a means of minimizing or preventing the destruction caused by natural
disasters. The insurance industry has begun promoting better and stronger building standards




                                                9
and enforcement because they affect insurance ratings and can reduce the claims made on
insurance companies after a natural disaster.

        Strong building codes are the foundation of Project Impact: Building Disaster Resistant
Communities, FEMA’s nationwide initiative to make prevention the focus of emergency
management in the United States. FEMA’s studies of tornado damage in 1999 found that there
would have been considerably less damage to residential structures if newer building codes and
engineering standards had been adopted, followed, and enforced. Building or upgrading homes
to the most recent versions of the codes and standards would have reduced significant damage to
homes in the direct path of less violent tornadoes. Many building failures could have been
avoided with better construction techniques, better building materials, and the effective use of
structural connections. During a 1999 speech, the U.S. Federal Insurance Administrator stated
that there is abundant evidence from 30 years of National Flood Insurance Program loss
experience that structures built to the program’s higher construction standards are 77% less
likely to be damaged, with fewer and less severe losses. The higher standards are estimated to
save U.S. taxpayers $800 million per year in damages avoided.

         The state should evaluate the costs and benefits of developing and implementing
statewide building standards for one- and two-family dwellings—weighing the cost of additional
regulation and inspection against the potential decrease in structural damage, injury, and loss of
life that could result from strengthening standards for residential housing throughout the state.


STATUS OF A POLYGRAPH EXAMINER FOR THE BOMB AND ARSON SECTION

        Section staff stated that bomb and arson investigations have been impeded because of
lack of a readily available polygraph examiner. Currently, the section has to borrow the services
of an examiner from either the Tennessee Bureau of Investigation (TBI) or the Bureau of
Alcohol, Tobacco, and Firearms (ATF). The department is not charged for these services. The
Director of Bomb and Arson indicated that getting access to a TBI examiner generally takes
approximately a week (24 hours in an emergency situation, e.g., in murder cases). The demand
for polygraphs is too high within the TBI and ATF for these agencies to promptly provide
polygraph services to the section in all circumstances. One special agent indicated that murder
cases sometimes require up to ten polygraphs involving suspects and witnesses.

        The major repercussion of not having a polygraph examiner available during initial
questioning of suspects and witnesses is that these individuals’ cooperation with special agents
tends to decline with the passage of time. Section staff stated that delays many times result in
suspects changing their minds about agreeing to be polygraphed because friends, relatives, or
attorneys convince them not to cooperate. According to the TBI Deputy Director, “As timing is
often essential in acquiring a confession and frequently there are no second chances, a polygraph
examiner can be a tremendously valuable asset to any investigative agency.” Another
repercussion of delayed polygraphs is cases turning “cold” (i.e., as information gets old it
becomes less valuable).




                                               10
        The Director of Bomb and Arson stated in January 2002 that he had gotten approval from
the Department of Finance and Administration’s Office of Criminal Justice Programs to use
federal Edward Byrne Memorial Grant funds to train a special agent as a polygraph examiner
and acquire related equipment. According to updated information obtained in November 2002, a
special agent is in polygraph school and is scheduled to complete his training in mid-December
2002. The training and related polygraph equipment were provided under the Department of
Commerce and Insurance’s Homeland Security Initiative.


NEED FOR BOMB AND ARSON STAFF TO BECOME CERTIFIED FIRE INVESTIGATORS

        The Director of Bomb and Arson stated that a bomb and arson investigator becoming a
Certified Fire Investigator (CFI) is equivalent to getting a graduate degree since it is “a very
demanding program” to complete. At the ATF, a CFI is considered above a street-level agent.
In court, CFIs qualify as expert witnesses. Officials from the ATF and fire marshal offices from
other states agreed on the value of CFI certification. According to the local ATF Special Agent
In-Charge, the CFI “is a specialization that lays a foundation for successful fire determination
and subsequent prosecution. The standards have to be high so the agent can take the expertise
from the fire scene to the courtroom scene.”

        The Bomb and Arson Section’s goal is that all special agents with five or more years of
experience will become CFIs. One certifying organization is the International Association of
Arson Investigators (IAAI). Nine of 20 field agents (and 7 out of 14 field agents with five years
of experience or more) had CFIs or CFI-related certifications, as of October 2001. Section staff
indicated that there was no incentive for certification, such as payment of examination fees or
increases in salary.

       As of November 2002, the director of Bomb and Arson indicated that the section was still
unable to provide any financial incentives for certification. However, the section has hired an
agent who is a CFI instructor, and the director’s plan is to develop an in-house program to grant
a Certified Fire and Explosives Investigator (CFEI) certification. Although such certification
would not result in increased salaries, agents could obtain the certification without having to pay
for exams, etc.


THE DEPARTMENT DOES NOT HAVE THE AUTHORITY TO OVERSEE FIRE
DEPARTMENTS

        Section 68-102-101 et seq., Tennessee Code Annotated, which outlines the powers of the
Division of Fire Prevention, does not give the department authority to oversee volunteer or full-
time fire departments. There is no formal definition of what a “fire department” is, including
who qualifies as a member of such a department. The fire department chiefs, as the
commissioner’s “assistants,” are only required to report suspicious fires within ten days.

       The Assistant Commissioner for Fire Prevention indicated several negative repercussions
regarding the lack of regulation of fire departments. The department cannot respond to citizen


                                                11
complaints regarding issues such as departments’ slow responses to fire or solicitation of funds.
In cases of solicitations, citizens sometimes have suspicions as to whether departments are
properly using raised funds. According to the assistant commissioner, an individual can put a
sign “on a barn,” call himself a fire department, and collect money through subscriptions.

        Another issue is the identification of fire departments for the purposes of grants. The
federal government (e.g., the U.S. Fire Administration) and the state need to be assured that grant
funds do not go to fraudulent fire departments. A third issue is which individuals have the right
to attend the Tennessee Fire Service and Codes Enforcement Academy for firefighting training.
A fourth issue is which local agencies the department should communicate with as “fire
departments.” The assistant commissioner stated that there has to be a minimum standard for
fire department operations for citizens to know exactly what a fire department is and should be
doing, and to prevent a false sense of security. He added that city fire departments are not the
problem; the volunteer ones are.

        According to the Director of Bomb and Arson, another problem is the presence of
“firebugs,” or arsonists, among members of volunteer fire departments. As of October 2001, 11
such individuals had been identified by special agents as suspects and/or defendants during the
past three years. The director stated,

       Nearly $1,700,000 in fire losses resulted because of the action of these
       defendants. Targets included a fire department, a car dealership, residential
       dwellings, barns, a mobile home, and a house of worship. There were no deaths
       or injuries associated with these incidents . . . We emphasize that the bulk of men
       and women in the volunteer fire service provide a valuable contribution to their
       respective communities. However, inasmuch as screenings and background
       checks are rarely conducted, a relatively small number of individuals with less
       than pure motives are sometimes members of these units.

         In addition to the cases worked by Bomb and Arson, the section assisted the Hamilton
County Sheriff Department’s arson unit in 1998 with an arson case involving seven volunteer
firefighters, one of whom burned to death. State arson investigators in other states also indicated
a “firebug” problem. According to the U.S. Fire Administration’s Arson in the United States,
inadequate screening of volunteer firefighters is a major cause of the problem. “One of the most
egregious situations is when a firefighter betrays the public’s trust and turns to arson. . . . While
it is not possible to predict a person’s behavior absolutely, warning signs of the propensity of a
prospective fire service member to set fires might be discovered through proper screening and
background checks.” Motives of these arsonists include excitement, wanting to appear a hero,
and frustration because of a lack of fire incidents.

       Some other states have the authority to regulate fire departments. In Maryland, for
example, all fire departments have to be chartered by the state. Members of fire departments are
required to undergo background checks. Although Ohio does not formally define “fire
department,” firefighters must be recognized by the State Fire Marshal or be trained through
approved training programs.




                                                 12
       The General Assembly may wish to consider a formal definition of “fire department,”
which would include training and background screening requirements for firefighters and would
delineate between full-time and volunteer fire departments. The General Assembly may also
wish to consider giving the Department of Commerce and Insurance authority to intervene when
problems arise that threaten fire service in a particular locality.


AIMS 2000

        The purpose of Arson Intervention and Mitigation Strategy (AIMS) 2000 is to replace the
section’s old paper case management system, which did not give staff the ability to electronically
retrieve information. A pilot project funded by the U.S. Fire Administration, AIMS 2000 is
designed to collect case data from field staff, the arson programs of six major cities in Tennessee
(Chattanooga, Jackson, Johnson City, Knoxville, Memphis, and Nashville), and also from federal
databases. Special agents enter data straight into their laptop computers, which then transmit the
data to the AIMS 2000 server located at the Department of Finance and Administration’s Office
for Information Resources (OIR).

        In addition to allowing electronic data retrieval, AIMS 2000 makes data entry easier and
helps ensure that case reports are complete. The system has “drop options” (i.e., multiple
choices for answers) that save time during data entry. A special agent also has to fill out all
fields on a particular input screen before he or she can go on to the next screen. These features
help ensure that all necessary data are entered into the system and that case information is
standardized. A good set of data is important because district attorneys are more likely to
prosecute if the case information provided is reliable and complete. In addition, when a case is
opened AIMS 2000 creates an incident report that goes straight to the commissioner, allowing
the commissioner to know about all reported arsons.

        Although Bomb and Arson staff indicated problems in implementing AIMS 2000,
including delays in training field staff in how to use the system and some difficulties in the
transfer of data from laptops to the system’s server, AIMS was fully implemented at the end of
2001. The section should continue to evaluate training needs or other problems of AIMS 2000
and implement timely solutions.


THE EMERGENCY COMMUNICATIONS BOARD AND ACCESS TO 911 SERVICES

        The Emergency Communications Board was created by Chapter 1108, Public Acts of
1998, for the purpose of ensuring that all Tennesseans have access to both landline and wireless
911 services. The board oversees the operations of local emergency communications districts,
which are responsible for improving access to 911 services at the local level. Pursuant to
Sections 7-86-302 and 304, Tennessee Code Annotated, such oversight includes ensuring the
financial stability of such districts and “assisting emergency communications district boards of
directors in the area of management, operations, and accountability, and establishing emergency
communications for all citizens of the state.”




                                                13
         The board is funded through a charge on all commercial mobile radio service subscribers
and users whose principal wireless service or billing address is in Tennessee. The specific
amount of the charge is determined by the board but must be approved by the General Assembly
through a joint resolution. Section 7-86-303, Tennessee Code Annotated, requires the board to
distribute 25 percent of the revenue generated by the charge to emergency communications
districts for the provision of 911 service based on their proportion of the state’s population, as
indicated by the most recent census.

      Section 7-86-307, Tennessee Code Annotated, requires the board to develop and
implement a statewide plan for landline and wireless enhanced services to all citizens of
Tennessee. Federal Communications Commission Order 94-102 of 1996 requires that wireless
enhanced 911 service be implemented in two phases.

       1. Phase One requires the ability to relay to the 911 centers the telephone number and
          the location of the cell site or tower receiving the wireless 911 call.

       2. Phase Two requires the capacity to identify the latitude and the longitude of a
          wireless 911 call, within a radius of 125 meters (401 feet), in 67 percent of all cases.

       Exhibit 1 indicates the extent of implementation of landline and Phase One services
county-by-county, as of April 2002. The board’s executive director indicated that landline and
Phase One implementation happens simultaneously. The vast majority of counties have both
services. Exhibit 2 indicates the extent of the implementation of Phase Two. Only 13 central
Tennessee counties have the capacity to receive Phase Two data from carriers.

        The board’s former executive director (who resigned in April 2002) indicated several
barriers to implementing all the board’s legislative mandates. These barriers include a small
staff having difficulty with technically complex regulatory duties, the lack of a technical
consultant to help the board with its regulation of emergency communication districts, and the
high cost of implementing Phase Two. Full implementation could cost up to $34 million a year,
more than the board takes in as wireless revenues. The board should consider solutions to these
barriers and make appropriate recommendations to the commissioner.




                                               14
                                                                                                                                                   Exhibit 1

                               County Compliance with Landline and Wireless Phase One 911 Service Requirements
                                                                 April 2002



                                                                                                                                                                                                                                                                                                                         Sullivan
                                                                                                                                                                                                      Pickett                                                                          Hancock
                                                                                                                                                                Macon                 Clay                                                                        Claiborne
                                                                                                                         Robertson                                                                                                                                                                 Hawkins                                   Johnson
                                                                                        Stewart      Montgomery
                                                                                                                                                                                                                                   Scott                                                                          Washington
                                                                                                                                          Sumner
                                                                                                                                                                                                                                                Campbell                                                                            Carter
                                                                                                                                                           Trousdale                                             Fentress
                                Obion                                                                                                                                         Jackson           Overton
                                                                                                                  Cheatham                                                                                                                                    Union       Grainger
                    Lake                                              Henry
                                                   Weakley                                Houston                                                                                                                                                                                      Hamblen
                                                                                                                                                                  Smith                                                                                                                                  Greene
                                                                                                                                                                                                                                                                                                                     Unicoi
                                                                                                                              Davidson                                                  Putnam                               Morgan          Anderson
                                                                                                        Dickson                                    Wilson
                                                                                                                                                                                                                                                                          Jefferson
                                                                               Benton
                        Dyer                                                                                                                                                                                                                               Knox
                                          Gibson                                        Humphreys                                                                       De Kalb                                                                                                                  Cocke
                                                                                                                                                                                           White             Cumberland
                                                                 Carroll
                                                                                                                      Williamson                                                                                                   Roane
                                                                                                                                            Rutherford                                                                                                                        Sevier
                                                                                                                                                               Cannon
                               Crockett                                                             Hickman
                                                                                                                                                                                        Van Buren                                            Loudon
           Lauderdale                                                                                                                                                                                                                                       Blount
                                                                                                                                                                           Warren
                                                                                                                    Maury                                                                                           Rhea
                          Haywood           Madison          Henderson                   Perry
                                                                                                                                                                                                   Bledsoe
      Tipton                                                                  Decatur                Lewis
                                                                                                                                             Bedford           Coffee
                                                                                                                                                                                                                                 McMinn       Monroe
                                                       Chester                                                                Marshall                                       Grundy                                  Meigs
                                                                                                                                                                                             Sequatchie
                                                                                                                                                   Moore
                                                                                         Wayne
  Shelby            Fayette         Hardeman                                                          Lawrence        Giles
                                                        McNairy            Hardin                                                                                                                     Hamilton         Bradley
                                                                                                                                         Lincoln             Franklin             Marion                                              Polk




                                                                                                                                                                                                                                                              County Compliance
                                                                                                                                                                                                                                                                          Compliant
                                                                                                                                                                                                                                                                          Not Compliant
Source: Department of Commerce and Insurance.




                                                                                                                                                              15
                                                                                                                                                   Exhibit 2

                                                   County Compliance with Wireless Phase Two 911 Service Requirements
                                                                                                                                                   April 2002


                                                                                                                                                                                                                                                                                                                          Sullivan
                                                                                                                                                                                                       Pickett                                                                          Hancock
                                                                                                                                                                 Macon               Clay                                                                          Claiborne
                                                                                                                         Robertson                                                                                                                                                                  Hawkins                                   Johnson
                                                                                        Stewart      Montgomery                                                                                                                     Scott
                                                                                                                                          Sumner                                                                                                                                                                   Washington
                                                                                                                                                                                                                                                 Campbell                                                                            Carter
                                                                                                                                                            Trousdale                                             Fentress
                                Obion                                                                                                                                          Jackson          Overton
                                                                                                                  Cheatham                                                                                                                                     Union       Grainger
                    Lake                                              Henry
                                                   Weakley                                Houston                                                                                                                                                                                       Hamblen           Greene
                                                                                                                                                                   Smith
                                                                                                                                                                                                                                                                                                                      Unicoi
                                                                                                                              Davidson                                                   Putnam                               Morgan          Anderson
                                                                                                        Dickson                                    Wilson
                                                                                                                                                                                                                                                                           Jefferson
                                                                               Benton
                        Dyer                                                                                                                                                                                                                                Knox
                                          Gibson                                        Humphreys                                                                        De Kalb                                                                                                                  Cocke
                                                                                                                                                                                            White             Cumberland
                                                                 Carroll
                                                                                                                      Williamson                                                                                                    Roane
                                                                                                                                            Rutherford                                                                                                                         Sevier
                                                                                                                                                                Cannon
                               Crockett                                                             Hickman
                                                                                                                                                                                         Van Buren                                            Loudon
           Lauderdale                                                                                                                                                                                                                                        Blount
                                                                                                                                                                            Warren
                                                                                                                    Maury                                                                                            Rhea
                          Haywood           Madison          Henderson                   Perry
                                                                                                                                                                                                    Bledsoe
      Tipton                                                                  Decatur                Lewis
                                                                                                                                             Bedford            Coffee
                                                                                                                                                                                                                                  McMinn       Monroe
                                                       Chester                                                                Marshall                                        Grundy                                  Meigs
                                                                                                                                                                                             Sequatchie
                                                                                                                                                   Moore
                                                                                         Wayne
  Shelby            Fayette         Hardeman                               Hardin                     Lawrence        Giles
                                                        McNairy                                                                                               Franklin                                 Hamilton         Bradley
                                                                                                                                         Lincoln                                   Marion                                              Polk




                                                                                                                                                                                                                                                              County Compliance
                                                                                                                                                                                                                                                                         Compliant*
                                                                                                                                                                                                                                                                          Not Compliant
Source: Department of Commerce and Insurance.                                                                                                                                                                                                                         * Carriers not yet transmitting data.




                                                                                                                                                             16
    EFFECTIVE OVERSIGHT AND MONITORING OF THE TENNCARE PROGRAM REQUIRE
    COORDINATION AMONG SEVERAL STATE AGENCIES

           The Department of Commerce and Insurance is one of several state agencies responsible
    for monitoring the TennCare program. Other state agencies having some oversight responsibility
    include the Department of Finance and Administration (including the TennCare Bureau), the
    Department of Health, the Department of Mental Health and Developmental Disabilities, the
    Office of the Comptroller of the Treasury, and the Tennessee Bureau of Investigation. In
    addition, the Select Oversight Committee on TennCare is the legislative committee charged with
    monitoring TennCare. Given the complexity of the program and the number of state entities
    involved, the coordination and sharing of information are of crucial importance for the consistent
    administration and monitoring of TennCare.

           Table 1 lists the state entities mentioned above, their authority, and their primary
    oversight responsibilities. A brief description of each entity’s oversight responsibilities follows.
    Since none of these entities, except the Department of Commerce and Insurance, fell within the
    scope of this audit, we did not assess the extent to which each fulfills its mission in relation to
    TennCare. However, we did evaluate the extent to which the Department of Commerce and
    Insurance works with other agencies.


                                                 Table 1
                                  State Entities Monitoring TennCare

          Entities                       Authority                         Primary Responsibilities
Department of Commerce      •   Sections 56-32-215 and 56-51-     •   Ensure HMO/BHO compliance with
and Insurance                   132, Tennessee Code Annotated         state law, contracts, etc.
                            •   Executive Order 1, effective      •   Provide financial oversight of
                                January 26, 1995                      TennCare MCOs
Department of Finance and   •   Executive Order 23, effective     •   Administer TennCare
Administration                  October 19, 1999
Department of Health        •   Section 56-32-215, Tennessee      •   Ensure an HMO can provide adequate
                                Code Annotated                        health care services
Department of Mental        •   Memorandum of Understanding       •   Administer the TennCare Partners
Health and Developmental        (between the department and           Program
Disabilities                    the Bureau of TennCare)
Office of the Comptroller   •   Memorandum of Understanding       •   Conduct audits of TennCare MCOs
of the Treasury                 (between Commerce and                 and BHOs, state agencies and
                                Insurance and the Comptroller’s       departments
                                Office)
                            •   Sections 4-3-304, 8-4-109, and
                                4-29-111, Tennessee Code
                                Annotated.
Tennessee Bureau of         •   Executive Order 47 (February      •   Investigate provider fraud
Investigation                   11, 1983)
Select Oversight            •   Sections 3-15-501 through 510,    •   Regularly review programs, functions,
Committee on TennCare           Tennessee Code Annotated              and activities related to TennCare



                                                     17
Department of Commerce and Insurance

        Executive Order 1, dated January 26, 1995, created the TennCare Oversight Division of
the Department of Commerce and Insurance to provide financial oversight of TennCare managed
care organizations (MCOs). Through oversight, examination, and other monitoring activities,
the division determines if the MCOs and behavioral health organizations (BHOs) participating in
TennCare are in compliance with statutory and contractual requirements relating to their
financial responsibility, stability, and integrity. As of April 22, 2002, ten managed care
organizations provided services for the 1.4 million Tennesseans enrolled in TennCare. Table 2
presents enrollment numbers by MCO. Enrollees are assigned to one of the two BHOs (Premier
or TBH) for mental health and substance abuse services.


                                            Table 2
                                      Enrollment by MCO
                                      As of April 22, 2002

                                          Medicaid/           Uninsured/              Total
                                          TennCare            Uninsurable
Better Health Plans                         25,732                18,151             43,883
BlueCare/Volunteer State                   152,050               134,878            286,928
John Deere                                  39,466                36,953             76,419
OmniCare                                    80,666                42,189            122,855
Preferred Health Partnership                56,143                57,178            113,321
TLC/Memphis Managed Care                   127,272                80,647            207,919
Universal                                   74,360                69,787            144,147
VHP                                         20,642                13,292             33,934
Xantus                                      86,289                77,685            163,974
TennCare Select                            148,950                93,043            241,993
                Statewide                  811,570               623,803          1,435,373


       The department is required by law to examine, at least every four years, the affairs of any
TennCare health maintenance organization (which includes all TennCare managed care
organizations) and any providers with whom the organization has contracts, agreements, or other
arrangements. The TennCare Division conducts these examinations, which focus on claims
processing operations, as well as financial and contractual compliance. See pages 26 and 22 for
discussions of claims processing and financial compliance respectively. Contractual compliance
issues include grievances/appeals, provider contracts, marketing, MCO/BHO coordination,
subcontractors, and Title VI.

       Table 3 lists the dates of the most recent examination reports released as of July 31, 2002.
The department has not issued recent examination reports for Xantus and TCCN since Xantus
has been in receivership since March 31, 1999 (the department essentially runs the program) and
TCCN had been under supervision since June 14, 1999, (with TennCare Oversight Division
examiners monitoring activities daily). Because of unresolved problems, the state terminated its


                                                18
contract with TCCN effective October 31, 2001. (See Appendix 4 for additional information
about Xantus and Appendix 5 for more information about TCCN.) Because Better Health Plans
and Universal Care joined the program July 1, 2001, examinations of these two plans had not
been released as of July 31, 2002. According to the assistant commissioner over the division, the
department wanted the plans to accrue six months of data before the first examination. Both
MCOs were, however, scheduled for examination fieldwork during 2002.

                                          Table 3
                         Most Recent Examination Reports Released
                                    As of July 31, 2002

                             Exam Period          Date Issued              Type of Exam
John Deere Health Plan    October 1, 1999 –     October 15, 2001    Claims Processing Market
                          December 31, 1999                         Conduct Exam
Memphis Managed Care      January 1, 1998 –         July 7, 1999    Claims Processing Market
d/b/a TLC Family Care     March 31, 1999                            Conduct Exam
Healthplan
OmniCare Health Plan      April 1, 2000 –      November 9, 2001     Claims Processing Market
                          June 30, 2000                             Conduct Exam and Limited
                                                                    Scope Financial Exam
Preferred Health          January 1, 1996 –         July 6, 1999    Claims Processing and
Partnership               December 31, 1997                         Financial Exam
Premier Behavioral        July 1, 1998 –        October 26, 2001    Claims Processing and
Systems                   June 30, 2000                             Limited Scope Financial Exam
Tennessee Behavioral      July 1, 1998 –        October 26, 2001    Claims Processing and
Health                    June 30, 2000                             Limited Scope Financial Exam
VHP                       October 1, 1995 –     February 23, 1998   Claims Processing and
                          June 30, 1997                             Financial Exam
Volunteer State Health    January 1, 2000 –     August 31, 2001     Claims Processing Market
Plan/BlueCare             March 31, 2000                            Conduct Exam and Limited
                                                                    Scope Financial and
                                                                    Compliance Exam

        Findings from the above examinations are found in Appendix 3. Examinations are
coordinated with auditors from the Comptroller of the Treasury’s TennCare Section. (See page
21.) Examinations are scheduled assuming three weeks of fieldwork and include financial,
contract compliance, and claims processing test work unless noted otherwise. Examiners do not
typically test compliance for services provided by subcontractors when those services are
provided off-site.

Department of Finance and Administration

      Executive Order 23, issued on October 19, 1999, transferred the functions related to
TennCare from the Department of Health to the Department of Finance and Administration,
making the department the primary agency responsible for TennCare. The department (i.e.,
TennCare Bureau) has the authority to receive, administer, and supervise all funds related to
TennCare, as well as promulgate rules and policies necessary for the program’s administration.



                                               19
In addition to its administrative duties, the TennCare Bureau monitors quality of care, network
adequacy, and contract compliance for the managed care organizations.

        The Department of Commerce and Insurance’s TennCare Oversight Division and the
TennCare Bureau must work together to ensure that statutory and contractual requirements are
enforced. According to the assistant commissioner, the TennCare Bureau asks the division to
review and comment on drafts of contracts to ensure appropriate regulatory language is included.
In addition, division staff refer enrollee complaints to appropriate Bureau personnel. The
division also depends on the TennCare Bureau to enforce findings of noncompliance. The
division does have limited authority to assess penalties for noncompliance, and it has used this
authority when a plan fails to remedy its claims processing deficiencies. When problems
continue, however, the department notifies the TennCare Bureau and advises the bureau to assess
liquidated damages. To ensure the bureau is informed of potential problems, division staff send
the bureau’s Director of Contract Compliance a copy of relevant correspondence with the MCOs.
While addressing problems with Xantus and TCCN, the division updated the bureau, as well as
other Finance and Administration officials, the Comptroller, and the Commissioner of Health, on
its regulatory actions.

Department of Health

        The Department of Health is responsible for determining whether a health maintenance
organization applying for a Certificate of Authority is capable of providing basic health care
services efficiently, effectively, and economically.       The department is to review the
organization’s medical management, quality improvement, utilization management, and other
programs, as well as the network of hospitals, physicians, pharmacies, and other providers in the
proposed service area. Thereafter, the department is required to inspect each organization at
least every three years. Findings must be reported to the Commissioner of Commerce and
Insurance, who may suspend or revoke a certificate of authority issued to an HMO.

Department of Mental Health and Developmental Disabilities

        The Tennessee Department of Mental Health and Developmental Disabilities [formerly
Tennessee Department of Mental Health and Mental Retardation] is the state agency responsible
for administering the TennCare Partners Program. By Memorandum of Understanding with the
TennCare Bureau, the department reviews BHO provider networks and develops quality
indicators for the Partners Program. The department is working with the TennCare Bureau on
establishing a monitoring unit that reports to both agencies.


Office of the Comptroller of the Treasury

       Several sections within the Comptroller’s Division of State Audit – Medicaid/TennCare,
Financial and Compliance, and Performance Audit - periodically monitor TennCare MCOs and
BHOs or the agencies responsible for the TennCare program and its oversight. Under a
memorandum of understanding between the Office of the Comptroller of the Treasury and the
Department of Commerce and Insurance, the Comptroller’s Medicaid/TennCare section and the



                                               20
department’s TennCare Oversight Division conduct joint examinations of each TennCare
managed care and behavioral health organization that contracts with the state. The memorandum
was formulated to help ensure that examination activities were coordinated and that there was no
duplication of effort. (The Medicaid/TennCare section is solely responsible for examinations of
Xantus, since Commerce and Insurance is currently running that program.) The Comptroller’s
Medicaid/TennCare section also conducts special reviews or other audit work for various aspects
of the TennCare program, as requested.

        The financial and compliance section conducts financial and compliance audits of all
state departments, agencies, and institutions. The most recent such audit of the Department of
Finance and Administration (including TennCare) was released in December 2001 and covered
the year ended June 30, 2001. The performance audit section conducts audits (pursuant to the
Governmental Entity Review Law) which focus on the extent to which state agencies and
departments fulfill their legislative mandates. The March 1999 Department of Health
performance audit focused largely on the administration of the TennCare program, and this
performance audit of the Department of Commerce and Insurance includes an evaluation of the
TennCare Oversight Division’s regulatory actions regarding TennCare MCOs and BHOs.

Tennessee Bureau of Investigation (TBI)

        The TBI Medicaid Fraud Control Unit (MFCU) investigates provider fraud.
Management of the MFCU frequently meet with each MCO, while MFCU investigators have
been assigned to meet with each MCO on a regular basis to educate the organizations on
identifying and reporting fraud. The MFCU helps host quarterly “Round Table” meetings where
representatives of all the MCOs and BHOs discuss problems relating to fraud. MFCU personnel
also reportedly meet with officials from the TennCare Bureau, Attorney General’s Office, the
Department of Commerce and Insurance, and the Health Related Boards to exchange ideas on
overlapping issues.

Select Oversight Committee on TennCare

        The intent of the Select Oversight Committee on TennCare is to help ensure that the
TennCare program will achieve its intended purpose, that access and quality of care are
maintained for TennCare enrollees, and that the General Assembly and the public can have
confidence that the state will deliver a TennCare program which is effective and efficient. To
that end, the committee’s scope includes

       •   reviewing proposed expenditures for TennCare;
       •   reviewing eligibility and enrollment standards, provisions of services, facilities, or
           programs by TennCare providers, and education programs for TennCare enrollees,
           MCOs, and providers;
       •   reviewing and evaluating the performance of TennCare MCOs, including their
           compliance with state contracts and provider agreements; and




                                               21
       •   reviewing legislation that will or will potentially impact any area within the scope of
           the committee.

Oversight Concerns

       For years, providers and provider groups have expressed concerns about adequate
oversight. Much of their concern stems from years dealing with contractual and financial issues,
which they believe have never been resolved. Furthermore, some do not think the state ensures
that MCOs and BHOs fulfill the terms of their contracts.

        After the collapse of two MCOs (Xantus and TCCN) and the significant financial
problems of one of the newest MCOs (Universal), the need for more effective oversight by all
entities involved is vitally important to the survival of the TennCare program. As the state
attempts to stabilize the program, it must ensure that appropriate controls are in place and
appropriately enforced and that information is coordinated and shared.


ANALYSIS OF THE TENNCARE OVERSIGHT DIVISION’S ACTIONS TO IDENTIFY AND
ADDRESS THE MCOS’ AND BHOS’ FINANCIAL PROBLEMS

        The mission of the TennCare Oversight Division is to protect the public health and the
integrity of the TennCare Program by overseeing, examining, and monitoring health
organizations participating in the program. Part of that responsibility is ensuring that the MCOs
and BHOs under contract with the state are in compliance with statutory and contractual
requirements relating to their financial responsibility and stability. While the division has
implemented several measures to assess an MCO’s or BHO’s financial solvency, these efforts do
not seem to protect against financial problems that may have disastrous effects. The financial
problems facing the TennCare MCOs have become so significant that, in order to stabilize
TennCare, the state assumed all risk for the program for 18 months, beginning July 1, 2002.
Under the “stabilization plan,” the state assumes the financial risk for the TennCare Program and
pays each MCO an administrative fee, as well as paying the MCOs’ premium tax. In addition,
each MCO is eligible for an additional 2% if it meets performance goals in areas such as network
adequacy and generic prescription drug utilization.

Minimum Net Worth

       Minimum net worth requirements for MCOs are defined in Section 56-32-212, Tennessee
Code Annotated, while the TennCare Partners contract delineates minimum net worth for the
BHOs. (Net worth is the excess of total admitted assets over total admitted liabilities.) To meet
minimum net worth requirements, MCOs and BHOs must maintain a net worth of $1,500,000 or
an amount totaling 4% of the first $150,000,000 of annual premium revenue as reported on the
most recent annual statement filed with the commissioner and one and one-half percent of the
annual premium revenue in excess of $150,000,000.

        Each MCO and BHO is required to submit quarterly and annual financial statements as
prescribed by the National Association of Insurance Commissioners (NAIC). Division staff



                                               22
review these reports to determine if a plan is in compliance with its net worth requirement.
Discrepancies in net worth are communicated to the plan as well as to the TennCare Bureau, and
corrective action is required.

       Table 4 presents net worth reported on June 30, 2002. As indicated, Memphis Managed
Care, Universal, Premier, and Xantus (which is in receivership) reported deficiencies in their net
worth. The financial problems of Universal, Xantus, and TCCN (whose contract was terminated
October 31, 2001) are discussed below.


                                           Table 4
                             Reported Net Worth as of June 30, 2002

                MCOs/BHOs                   Net Worth            Net Worth               Excess
                                           Requirement            Reported            (Deficiency)
Better Health Plans (1)                     $2,956,800             $3,350,920              $394,120
John Deere                                 $12,377,685            $75,854,594          $63,476,909
Memphis Managed Care/TLC                    $7,201,830             $4,624,917          ($2,576,913)
Preferred Health Partnership                $6,821,720            $16,270,488            $9,448,768
OmniCare                                    $4,544,249             $5,416,133              $871,884
Universal (1) (2)                           $6,522,000             $5,637,208            ($884,792)
VHP                                         $1,816,510             $6,506,350            $4,689,840
Volunteer State                            $16,673,233            $54,991,616          $38,318,383
Premier (BHO)                               $6,918,195             $2,265,149          ($4,653,046)
Tennessee Behavioral Health (BHO)           $5,514,875            $11,652,307            $6,137,432
Xantus                                      $7,998,884          ($77,237,383)        ($85,236,267)
Notes:
(1) These MCOs did not begin operations until July 1, 2001. The net worth requirement has been
    increased above the statutory minimum based on projected premium revenue.
(2) Universal has been placed under the administrative supervision of the Commissioner of Commerce
    and Insurance as a result of identified financial and claims processing operations problems. Further
    regulatory actions by the department are subject to the Centers for Medicare and Medicaid Services’
    and the TennCare Bureau’s response to the request by Universal for additional funding. The
    collectibility of this receivable is pending resolution by the Centers for Medicare and Medicaid
    Services and the TennCare Bureau. If this receivable is deemed uncollectible, the department will
    adjust Universal’s reported net worth from $5,637,208 to ($40,349,575).

        Division staff also monitor a plan’s financial compliance through periodic examinations
that include procedures such as

         •   reconciling annual/quarterly NAIC statements to the trial balance and general ledger
             of the organization;
         •   reconciling the NAIC annual statement to the audited financial statements;
         •   determining if assets are correctly reported as “admitted” or “non-admitted” on the
             annual statement;


                                                  23
       •   verifying and testing cash, cash equivalents, short- and long-term investments,
           premiums receivables, health care receivables, and other assets;
       •   reviewing methods used to calculate the incurred but not reported (IBNR) claims;
       •   reconciling premium revenues to payments made by TennCare;
       •   testing selected capitation payments for accuracy;
       •   examining the allocation of health care expenses for proper classification on the
           NAIC annual/quarterly statements; and
       •   verifying administrative expenses.

       We obtained copies of the most recent examination reports for each MCO and BHO
during our fieldwork. The findings resulting from those examinations are presented in Appendix
3.

Financially Troubled MCOs

       Since the implementation of TennCare, at least three MCOs (Xantus, TCCN, and
Universal) have encountered severe financial problems. A brief description of these financial
problems is discussed below. Detailed information regarding Xantus and TCCN can be found in
Appendices 4 and 5, respectively.

Xantus. The division first notified Xantus of a $2.3 million net worth deficiency on April 8,
1998. The division closely monitored Xantus and repeatedly notified the plan of its worth
deficiencies. When the MCO failed to meet its statutory net worth requirement Xantus and the
state entered into a Confidential Agreed Order of Supervision on November 30, 1998. Despite
close monitoring by the division, Xantus failed to meet the provisions of the Agreed Order,
prompting the commissioner to file a Verified Petition for Entry of Consent Order Appointing the
Commissioner of Commerce and Insurance Receiver for Purposes of Rehabilitation on March
31, 1999. Xantus continues to operate in receivership.

TCCN. TCCN’s problems occurred soon after Xantus’. The division issued an Agreed Order of
Supervision on June 14, 1999, because of TCCN’s failure to satisfy its statutory net worth
requirements. By the end of 1999, however, TCCN’s financial statements showed that the
company had adequate net worth to meet its liabilities and its statutory requirements. During the
first quarter of 2000, the division began receiving increased and material complaints from
providers and other sources regarding a lack of payments or inaccurate payments from TCCN.
In April 2000, an operational audit by William M. Mercer, Inc., found that TCCN was
experiencing major claims payment performance problems since the conversion of its claims
system in December 1999.

       On May 10, 2000, the Commissioner of Commerce and Insurance issued a Notice of
Administrative Supervision based on problems with TCCN’s financial and claims processing
system. Throughout supervision, division staff maintained a daily presence at TCCN. In
September 2000, supervision was extended through June 30, 2001. The division’s analysis of
TCCN’s financial condition as of June 30, 2000, found a serious net worth deficiency. On


                                                24
January 3, 2001, the Commissioner of Commerce and Insurance filed an order to rehabilitate
TCCN in Davidson County Chancery Court. The Court, however, dismissed the petition.
Because TCCN never demonstrated compliance with its statutory net worth requirement, the
state terminated TCCN’s contract effective October 31, 2001. A petition to liquidate TCCN’s
assets was granted on November 2, 2001.

Universal Care. Universal Care, one of the programs newest plans, has already experienced
financial distress. On September 25, 2001, the division met with Universal regarding concerns
about net worth requirements, the medical loss ratio reports, compliance with prompt pay
requirements, and administrative costs. At this meeting, Universal agreed to submit daily claims
activity reports to the division, and division staff visited on-site to review the reports. Quarterly
statements and medical loss ratio reports filed during November and December 2001 identified
incompletions and worsening problems of medical loss ratio and net worth deficiency. As a
result, division and Comptroller’s Office staff moved up their joint examination of Universal,
conducting fieldwork from January 14 to February 18, 2002.

        On March 22, 2002, the TennCare Bureau notified the MCO of the state's intention to
terminate its contract effective April 30, 2002, because of problems identified during the state's
oversight of Universal Care. As a result of negotiations, Universal entered into a no-risk
agreement with the state on April 12, 2002. In May 2002, the division began tracking
Universal’s daily cash balances and prior approving all cash disbursements. The division also
obtained the services of a consultant to assist in the on-going review of Universal’s claims
processing. In August 2002, the division performed another on-site examination and contracted
for a review of certain claims processing procedures identified as critical. On September 13,
2002, Universal agreed to be placed under administrative supervision by the Commissioner of
Commerce and Insurance because of its continued financial and claims processing problems.

Actions Taken to Strengthen Oversight and Enforcement

        According to the assistant commissioner, over the last several years, the division has
identified statutory gaps in the division’s oversight of managed care organizations, including
HMOs and BHOs. The division has taken actions, including proposing and achieving new
legislation, adopting administrative rules and regulations, and implementing interagency
agreements, in an attempt to increase oversight and prevent such serious financial problems in
the future. Statutory changes enacted have included the Health Care Consumer Right-to-Know
Act and the Fraudulent Insurance Act, as well as amendments to the Health Maintenance
Organization Act, the Medical Assistance Act, and the Insurance Holding Company System Act.

        Most provider complaints involve MCOs that have experienced or are experiencing
financial problems. These complaints range from denied claims, lack of payment for claims to
recoupments of claims already approved/paid. In addition, providers believe they have a right to
know the financial condition of the plan with which they contract. (Recent changes in legislation
should address this concern because financial records of TennCare MCOs will be open to public
inspection.) Concerns about the financial stability of the TennCare MCOs are not unique to
providers. In order to stabilize the health care plans and ensure the future of the program, the




                                                 25
TennCare Oversight Division advised and the TennCare Bureau proposed that the state assume
all risk for the program effective July 1, 2002, through December 31, 2003.

         In consultation with other entities involved in the monitoring and enforcement of the
TennCare Program, the division should continue to seek out changes in procedures, legislation,
etc., that could help it respond as quickly as possible to indications of financial problems of the
MCOs and BHOs.


ANALYSIS OF THE TENNCARE OVERSIGHT DIVISION’S EFFORTS TO ENFORCE
COMPLIANCE WITH CLAIMS PROCESSING REQUIREMENTS

       Claims processing problems have plagued the TennCare program since its inception in
1995. Despite the state’s efforts to increase monitoring and enforcement of timely claims
processing, some TennCare HMOs have not complied with claims processing requirements.
These problems continue to frustrate TennCare providers and, if not addressed, may result in a
breakdown of TennCare provider networks.

Timely Claims Processing

        The Prompt Pay Act requires that each health maintenance organization ensure that 90%
of “clean” (i.e., properly completed by provider) claims for payment for services delivered to a
TennCare enrollee are paid within 30 days of the receipt of such claims and that 99.5% of all
provider claims be processed within 60 days of receipt.

        To determine compliance with the Prompt Pay Act, the division requests that MCOs and
BHOs generate a claims data file for processed claims for certain test months. The data file
request should include all claims processed through final adjudication, either paid or denied, and
capitated claims. In addition, the division requests a claims data file for pending claims and a
paid claims report relevant to the test months. The division analyzes these files to determine the
payment lag time by subtracting the received date from the paid date for each unique claim. In
addition, the division reconciles the total paid per the data file as compared to the total paid per
the paid claims report (relevant to the test months).

        Although the Prompt Pay Act became effective on October 1, 1999, and the division has
been testing for compliance since, a formal policy statement was not issued until May 2, 2001,
when the division sent a letter to all MCOs and BHOs detailing DCI and TennCare Bureau
policies and procedures relating to the monitoring of compliance with the Prompt Pay Act.
Universal Care and Better Health Plans received letters on October 18, 2001, because they
entered the program on July 1, 2001. The following procedures became effective on that date:

       1. Each quarter the department will request a data file for a selected test month and
          analyze the data file for compliance.
       2. Any deficiencies will be identified and provided to the MCO/BHO in writing.




                                                26
      3. The MCO/BHO will have an opportunity to respond within 10 days of the date of the
         letter to explain any deficiencies.
      4. Any unresolved deficiencies will result in immediate enhanced monitoring
         procedures by the department, including additional data file requests and/or site visits
         by department examiners.
      5. Should the MCO/BHO fail to correct the deficiencies by the next month’s data file
         submission, the department will levy a $10,000 administrative penalty.
      6. Should the deficiency continue after the month in which the liquidated damages have
         been assessed, the TennCare Bureau will begin withhold procedures against the
         MCO’s/BHO’s monthly capitation payment until the deficiencies are corrected.

       We reviewed prompt pay compliance as determined by the division beginning January
2001 through January 2002 for each MCO and BHO. Table 5 shows the MCOs and BHOs that
were not in compliance with the Prompt Pay Act and the months in which they were not
compliant. Volunteer State Health Plans (BlueCare and VSHP Select) and Better Health Plans
were the only MCOs/BHOs that met the prompt pay requirements when tested throughout this
timeframe. The results of prompt pay analyses for each MCO and BHO are presented in
Appendix 6.




                                              27
                                      Table 5
                   MCO/BHO Compliance with Prompt Pay Requirements
                         January 2001 through January 2002

                      MCO/BHO                                Months Not Compliant with
                                                             Prompt Pay Requirements
Better Health Plans (BHP)
John Deere Health Plans (JDHP)                      January 2001
Memphis Managed Care (MMCC)                         April 2001        June 2001
                                                    May 2001          January 2002
OmniCare (OHP)                                      October 2001
Preferred Health Partnership (PHP)                  January 2001
                                                    April 2001
Tennessee Coordinated Care Network (TCCN)           January 2001      June 2001
                                                    April 2001        July 2001
                                                    May 2001
Universal Care (UCT)                                September 2001    December 2001
                                                    October 2001      January 2002
                                                    November 2001
Vanderbilt Health Plans/Victory Health Plans        January 2001
(VHP)                                               January 2002
Volunteer State Health Plans (VSHP)
Xantus (XHT)                                        January 2001      May 2001
                                                    April 2001
Premier Behavioral Systems (Premier)                January 2001      August 2001
                                                    April 2001*       September 2001
                                                    July 2001         October 2001
Tennessee Behavioral Health (TBH)                   January 2001      July 2001
                                                    April 2001        August 2001
                                                    May 2001          September 2001
                                                    June 2001         October 2001
* Fee for Service Only claims.

        Universal Care has experienced claims processing problems almost since it entered the
program on July 1, 2001. State law does not require a TennCare MCO to provide a claims
processing plan in order to obtain a Certificate of Authority to operate in Tennessee. In
September 2001, TennCare engaged Pacific Health Policy Group to conduct an operational
assessment of Universal because of provider feedback and early internal indications of claims
processing problems. The assessment indicated that the claims payment issues were largely
start-up related. In a January 2002 report to the TennCare Oversight Committee, the TennCare
Bureau stated that Universal had made significant progress through December and that it
expected the plan to be in full compliance in the coming months. Since that time however,
Universal has been placed under the administrative supervision of the Commissioner of
Commerce and Insurance because of identified financial and claims processing problems.
Commerce and Insurance staff continue to work with Universal to identify and correct claims


                                               28
processing errors. Consultants hired by the department were on site in August 2002 to assess
Universal’s claims processing operations.

        To enforce compliance with the Prompt Pay Act, the division can assess an
administrative penalty and request that the TennCare Bureau assess liquidated damages, if
appropriate. Table 6 shows the history (January 2001 – January 2002) of administrative
penalties assessed by the division for failure to comply with prompt pay requirements. At the
time the penalties were assessed, the division typically recommended that the TennCare Bureau
withhold capitation payments until the deficiencies were corrected, which is consistent with
policy. Because of time lags involved in carrying out the compliance tests, allowing for due
process, etc., an MCO or BHO may have failed to comply for several months before penalties
are assessed. In Universal’s case, the division assessed an administrative penalty in December
2001, but decided not to recommend the withholding of capitation payments because of the
company’s serious financial problems.

                                          Table 6
                 Administrative Penalties Assessed Against MCOs & BHOs
                          January 2001 Through January 2002


                           MCO/BHO                                    Date Levied
        Memphis Managed Care                                    July 12, 2001
        Tennessee Coordinated Care Network                      July 12, 2001
        Universal Care                                          December 12, 2001
        Xantus                                                  July 12, 2001
        Premier                                                 December 12, 2001
        Tennessee Behavioral Health                             July 12, 2001

       In addition to the quarterly analysis of claims data, the division has developed a market
conduct examination program to focus on claims processing for the purpose of identifying claims
processing deficiencies, inefficiencies, or system weaknesses. More specifically, examiners

       •   determine compliance with the legal requirement for the timely processing of claims;
       •   test for adjudication accuracy to determine if claims selected were properly paid,
           denied, or rejected;
       •   test deductible and co-payments to determine if out-of-pocket payments are
           accurately calculated;
       •   test pending claims for claims over 60 days old from date of receipt and determine if
           the amount of pending claims represents a potential unrecorded material liability;
       •   determine if the MCO/BHO has the capability to process claims submitted
           electronically; and
       •   verify the accuracy of the weekly claims processing reports submitted to the
           TennCare Bureau.


                                              29
          See Appendix 3 for most recent examination findings.
Independent Reviews
        The Prompt Pay Act also established the Independent Review process, which allows
providers to seek redress for claims that have been partially or totally denied. When a provider
files a complaint (either by phone or by mail) with the division, staff notify the provider in
writing of the right to request an independent review. In addition, staff send the provider
information explaining the independent review process. (Each health maintenance organization
must contract with several persons to act as independent reviewers. These persons are selected
by the department’s Claims Processing Panel.) We reviewed 44 written complaints and 33
telephone complaints for the period January 1, 2000 through September 10, 2001, and found that
the division followed this policy in all cases.
        Providers choosing an independent review must submit appropriate documentation to the
TennCare compliance officer. However, the division does not have authority to intervene in the
resolution of disputed claims but may use information regarding disputed claims to monitor
MCO compliance.
       The table below lists independent reviews as of August 22, 2001, by decision and by
plan. As the table shows, a majority (71%) of the independent reviews were filed against TCCN.
The table also indicates that, in most cases, the decision favored the provider. The division
summarizes independent review information on a regular basis and, according to division
management, information is sent to the TennCare Bureau as well as to staff performing
examinations.
                              Independent Reviews (by Decision and Plan)
                                        As of August 22, 2001

                                Total JDHP MMCC OHP PHP     Premier TBH TCCN VHP VSHP XHT

Ineligible                       24                              2         21         1
MCO to Pay Unpaid Claims          1                                         1
N/A                               1                     1
Pending                           1                1
Rescinded                         1                                         1
Reversed MCO’s Denial            28                              1   2     23               2
Reversed MCO’s Denial in          8                     1                   4         3
 Part & Upheld in Part
Settled for MCO                   1    1
Settled for Provider             21                1             1         15         1     3
Settled in Part for MCO and       1                                         1
 in Part for Provider
Upheld MCO’s denial              11          1                       5      4         1
TOTAL:                           98    1     1     2    2        4   7     70   0     6     5




                                                 30
Conclusion

        Efforts to strengthen oversight and enforcement of claims processing have evolved over
time. In most cases, these efforts are reactions to serious deficiencies rather than proactive
strategies. By the time new requirements are implemented, providers and hospitals may have
sustained substantial losses. Providers continually complain about claims processing operations
of the TennCare MCOs and are increasingly frustrated with the division’s oversight and
enforcement efforts.

       The Department of Commerce and Insurance, TennCare Oversight Division, should
continue to assess claims processing problems and take appropriate action when necessary,
including pursuing legislation to strengthen its oversight and enforcement responsibilities
regarding claims processing. The division should work with other state agencies (i.e., the
TennCare Bureau, Comptroller’s Office), the legislature, the MCOs and BHOs, and providers or
provider groups to develop proactive strategies to address claims processing issues.



                          FINDINGS AND RECOMMENDATIONS



Division of Insurance

1. Financial analysis process policies and procedures are applied inconsistently

                                             Finding

         The Division of Insurance conducts quarterly and annual financial analyses of insurers
domiciled in the state. The purpose of these analyses is to enable the division to identify as
quickly as possible insurers in financial trouble and/or engaging in unlawful and improper
activities. Based on our review of analysis files, however, the formal and informal policies and
procedures in place regarding this process are not applied consistently in all cases. The
inconsistent application of policies and procedures, both formal and informal, may hinder the
division’s ability to detect financially troubled insurers and/or insurers engaging in unlawful and
improper activities, thereby endangering the policyholders of Tennessee.

        Financial analyses are conducted in accordance with internal policy established by the
Division of Insurance in conjunction with guidelines established by the National Association of
Insurance Commissioners (NAIC). Division staff reported that the most critical procedures
performed in the financial analysis review process are the completion of the Audit Sheet and the
Point Sheet in both the annual and quarterly reviews. The completed Financial Analysis Audit
Sheet represents the foundation of the analytical process. This function ensures that the analyst
reviews the most vital balances, variations, and percentages. The Point Sheet ensures that the
analyst’s and supervisor’s comments and recommendations are written in a systematic manner,
enabling the reviewer to obtain a clear understanding of the current financial condition of the


                                                31
insurance company. By enabling the analyst to detect potential solvency concerns, the Audit
Sheet and the Point Sheet help protect policyholders. In our review of 20 companies (testing for
attributes on both the 2000 Annual and the March 2001 quarterly financial desk audit analyses),
one of the 19 company files (5.3%) that should have had such information did not contain the
annual Audit Sheet. The Audit Sheet was present in all other instances on both the annual and
quarterly financial analysis reviews. The Point Sheet was present in all company files for both
the annual and quarterly financial analyses.

       (Throughout this finding, the number of files reviewed will vary by attribute. There are
several reasons for these variations. For example, health maintenance organizations are not
required to file with the NAIC. Therefore, documentation obtained from the NAIC was not
available for the HMOs, and those organizations’ files were not included in the reviews of
NAIC-related attributes. There are also variations in the number of files for attributes
concerning supervisory reviews. In cases where a company’s documentation (e.g., the Audit
Sheet) was missing, we were unable to verify whether the required analyst and supervisory sign-
offs were documented. Therefore, instead of assuming that such sign-offs did not take place, we
considered those items not applicable and did not include them in our calculation of items
reviewed.)

        The Priority Assignment Memorandum provides information concerning an insurance
company’s assignment of priority and the reasons behind the assignment. The memo ensures
that the companies with the most severe financial concerns are analyzed first and in a more in-
depth manner. This enables the analyst to detect solvency issues more quickly. All of the 19
company files reviewed contained a Priority Assignment Memo in the annual financial analysis
review, as well as an update to the memo reflecting the quarterly financial analysis review.

       The division uses the Insurance Regulatory Information System (IRIS) ratio to
supplement the Audit Sheet and the Point Sheet and enhance the financial analysis process by
providing additional indicators as to the stability of an insurance company. The IRIS ratio,
which is calculated annually by the NAIC, is composed of 12 separate ratios for life insurance
companies and 11 ratios (with one ratio having two parts) for property and casualty companies.
The ratio is used to ascertain an insurance company’s financial position. Additionally, each
element of the ratios is evaluated separately on the analytical point sheet when a ratio indicates
an unusual value. All of the 16 company files reviewed contained the IRIS ratio scores.

        The NAIC, in its March 2000 accreditation review, strongly criticized the Insurance
Division, specifically citing a lack of adequate review in the financial analysis process by both
analysts and supervisors. The division has instituted a sign-off policy that requires the analyst to
document and attest to the timeliness and adequacy of work with his or her initials and the date
of completion. Supervisors are required to document their review by initialing and dating key
procedures, such as the Audit Sheet, the Point Sheet, the Priority Assignment Memo, the Holding
Company Checklist, and the CPA Audit Checklist. This ensures that each analytical review
receives additional comments and recommendations from supervisors who have more experience
in insurance regulation, thus aiding in the detection and resolution of solvency issues.




                                                32
       Combining annual and quarterly financial analysis files reviewed, there were 106
required sign-off areas for the analysts on the Audit Sheets, the Priority Assignment Memos, the
CPA Audit Checklist, and the Holding Company Checklist. Nearly 5% (5 of 106) of these areas
were not initialed or were initialed at a later date by the analyst. There were 142 sign-off areas
for supervisory review on the Audit Sheets, the Point Sheets, the Priority Assignment Memos,
the CPA Audit Checklist, and the Holding Company Checklist. Of these sign-off areas, 4 of 142
(2.8%) were not initialed appropriately by a supervisor.

        The Financial Analysis Section of the Division of Insurance uses an internal guideline
which serves as a timetable for the timely completion of Audit Sheets and Point Sheets for both
the annual and quarterly reviews. These deadlines, which vary according to the company’s
priority assignment, are more stringent than NAIC timeliness guidelines. Two of 19 annual
financial analysis files reviewed (10.5%) had neither the Lead Audit Sheet nor the Point Sheet
completed in a timely manner based on the dates set forth by the timetable. In addition, the Lead
Audit Sheet and the Point Sheet were not reviewed by a supervisor within the stated timeframe in
2 of 19 files (10.5%). In 36.8% (7 of 19) of the quarterly financial analysis files reviewed, the
Lead Audit Sheet and the Point Sheet were not completed within the deadline; and nearly three-
fourths of the reviews (14 of 19) did not have the supervisory review completed in a timely
manner.

        Soon after the incident involving the Franklin American Life Insurance Company
surfaced in March 2000, the Assistant Commissioner of the Division of Insurance issued a policy
statement requiring a net income/loss review of each company based on the current year (as well
as the past two years). Testing for adverse financial trends with the Net Income/Loss Two-Year
History provides a means to detect declining profitability and impairment of potential net worth.
Continued net losses could deplete the company’s surplus, thus potentially affecting solvency
and endangering policyholders. At the time of our file review, only the annual Audit Sheets for
the life insurance companies contained a step addressing the net income/loss review for the
current year as well as the previous two years. Audit Sheets for the property and casualty
insurance companies and HMOs (Health Maintenance Organizations) did not. As a result, 10 of
19 (52.6%) of the insurance company financial analysis files reviewed did not address the net
income/loss two-year history of the company. The Financial Analysis Section has now added a
step to the 2002 Audit Sheet for property and casualty insurance companies requiring the analyst
to check the net income/loss for the current year as well as the past two years.

        All companies’ files contained evidence of the Actuarial Opinion as required. In addition
to attesting to the adequacy of the company’s reserves, the opinion supplements the Audit Sheet
in verifying the company’s ability to pay claims. In order to comply with NAIC
recommendations following the March 2000 accreditation review, analysts are now required to
send a quarterly e-mail requesting information from other divisions within the department
regarding domestic insurance companies under review. Of the 20 financial analysis files
reviewed, 8 (40%) did not contain documentation of this e-mail.




                                               33
                                       Recommendation

        The Division of Insurance should take action to ensure that all financial analysts and
supervisors are aware of all policies and procedures (both formal and informal) related to the
financial analysis process and hold staff accountable for applying those policies and procedures
on a uniform and consistent basis.


                                   Management’s Comment

       We concur in part. In general, the department disagrees with the conclusion drawn that
policies and procedures are applied inconsistently. Overall, the Insurance Division adheres to
the National Association of Insurance Commissioners’ [hereinafter the NAIC] standards relevant
to the review of financial documents and the timing of such reviews, and in many cases complies
with standards promulgated by the Insurance Division that exceed the NAIC’s requirements.
Furthermore, during the timeframe that was reviewed, the Insurance Division was in the process
of creating and filling new analyst positions to meet the Insurance Division’s “super-strict”
deadlines.

       The department agrees with the following specific findings:

           •   “One of the 19 company files (5.3%) did not contain” an audit sheet. The
               department concurs that this audit sheet was not in the file. The particular audit
               sheet leading to this statement had been misplaced; however, the audit was
               completed based on the Insurance Division spreadsheet that tracks this process.

           •   “Of the sign-off areas, 4 of 142 (2.8%) were not initialed appropriately by the
               supervisor.”

           •   “Two of 19 annual financial analysis files reviewed (10.5%) had neither the Lead
               Audit Sheet nor the Point Sheet completed in a timely manner based on the dates
               set forth by the timetable. In addition, the Lead Audit Sheet and the Point Sheet
               were not reviewed by a supervisor within the stated timeframe in 2 of 19
               (10.5%).”

           •   “10 of 19 (52.6%) of the insurance financial analysis files reviewed did not
               address the net income/loss two-year history of the company.”

           •   “Of the 20 financial analysis files reviewed, 8 (40%) did not contain
               documentation of this e-mail.”

       The department disagrees with the following specific findings:

           •   “Nearly 5% (5 of 106) of these areas [on the audit sheet] were not initialed or
               were initialed at a later date by the analyst.” Based on the Insurance Division’s
               procedures implemented March 8, 2000, “the [appropriate document] must be


                                               34
    reviewed, initialed and dated by the employee responsible for performing the
    supervisory review.” Accordingly, the Insurance Division followed established
    procedures; the analyst initials were not required. The department believes this is
    a good suggestion and has implemented a procedure that requires the analyst to
    initial the top of the point sheets indicating that initial work was completed by that
    specific analyst.

•   “In 36.8% (7 of 19) of the quarterly financial analysis files reviewed, the Lead
    Audit Sheet and Point Sheet were not completed within the deadline; and nearly
    three-fourths of the reviews (14 of 19) did not have the supervisory review
    completed in a timely manner.” The department has reviewed these files and
    believe 1 of 19, or 5.2% of the quarterly financial analysis files reviewed, were
    not within the timetable established by the Insurance Division. However, the
    department maintains that Insurance Division staff did meet the NAIC standard
    for timely reviews. Documentation of this conclusion is detailed as follows, with
    supporting documents attached:

•   Aetna US HealthCare, Inc. – The analyst review was completed on June 27, 2001.
    This was a high priority company; based on the NAIC timetable, this review
    should have been completed by July 6, 2001.

•   Erlanger Health Plan Trust – The analyst review was completed on July 3, 2001.
    This was a low priority company; based on the NAIC timetable, this review
    should have been completed by August 3, 2001.

•   TRH Health Insurance Company–The analyst review was completed on July 3,
    2001. This was a medium priority company; based on the NAIC timetable, this
    review should have been completed by July 6, 2001.

•   Farmers Mutual of Tennessee, Tennessee Farmers Assurance Company and
    Tennessee Farmers Mutual Insurance Company – Each entity’s financial
    statement was received after the due date of May 15, 2001. The number of days
    the filing was late is added to the timetable, and, therefore, each review was
    timely completed.

•   The department has reviewed these files and is of the opinion that 10 of the 19
    files did not have the supervisory review completed within the timetable
    established by the Insurance Division; however, these reviews did meet the NAIC
    standard that the department adheres to. Documentation of this conclusion is
    detailed as follows, with supporting documents attached:

•   Erlanger Health Plan Trust – The Supervisor review was completed on July 3,
    2001. This was a low priority company; based on the NAIC timetable, this
    review should have been completed by August 17, 2001.




                                     35
           •   Farmers Mutual of Tennessee, Tennessee Farmers Assurance Company and
               Tennessee Farmers Mutual Insurance Company – Each entity’s financial
               statement was received after the due date of May 15, 2001. The number of days
               the filing was late is added to the timetable, and, therefore, each review was
               timely completed.


Implementation of Recommendation for Insurance Division Finding 1:

        The Insurance Division has included on the property and casualty insurance company
audit sheets the required question concerning net income/loss for the current year, as well as for
the past two years. In addition, the Insurance Division now requires all analysts to maintain hard
copies of initial quarterly electronic mails sent to various areas within the department, as well as
any and all responses received.

       Furthermore, the Insurance Division has increased its financial analysis staff since the
timeframe reviewed by this performance audit. This should help eliminate problems meeting
deadlines, as well as decrease the overtime required for Insurance Division staff to meet NAIC
accreditation requirements.

       Given the improvements that have been made in the Financial Affairs Section –
Analytical Unit since the timeframe of the review, the department does not currently plan to
suggest any additional action be taken, except to continue to improve the procedures that have
been developed.




2. The division does not adequately follow up to ensure that companies correct identified
   deficiencies

                                             Finding

        The division’s examination of an insurance company may result in a list of deficiencies
and directives with which the company must comply. The examination process is weakened,
however, by the division’s lack of timely, on-site follow-up to ensure that appropriate corrective
actions have been taken and that the company has remedied identified problems. Concerns about
the division’s examination follow-up system were also raised in the June 1992 performance audit
of the Division of Insurance.

       When the examiners complete fieldwork, the insurance company receives a draft of the
examination report. Before making a report public, the insurance company is given the
opportunity to rebut any deficiencies noted by the examiners. The Division of Insurance may
accept or reject any recommended changes made by the insurance company in the rebuttal. The
Commissioner of the Department of Commerce and Insurance then orders the examination report
adopted as filed, with or without modification, with directives (if applicable) to the company.



                                                36
        The division has the authority to invoke sanctions to ensure company compliance.
According to division staff, an insurance company’s compliance with directives is ascertained in
two ways. Letters sent to the company regarding deficiencies identified in the examination
report request that the insurance company “submit a letter of response within fifteen (15) days
with respect to these recommendations and indicate . . . proposed actions to correct each
deficiency.” Responses received from the insurance companies outline actions they have taken
to remedy identified deficiencies and comply with directives issued by the Department of
Commerce and Insurance. The Chief Examiner of the Insurance Division stated that, during the
quarterly review, analysts review those deficiencies the company has corrected, those the
company is still in the process of addressing, and those that the company has not corrected.
However, analysis staff stated that their review is limited to what can be determined through a
review of financial statements. Furthermore, in our review of the quarterly analysis files, we
found no evidence of follow-up performed by the analysts to monitor the correction of
deficiencies noted during the examination process.


                                       Recommendation

       Division of Insurance management should implement a process that includes on-site
follow-up of serious deficiencies to ensure that those deficiencies have been corrected by the
insurance companies. Division staff and department legal staff should coordinate to ensure that
sanctions are issued against companies that fail to correct serious deficiencies.


                                   Management’s Comment

       We concur. The department agrees that a process should be developed that includes post-
examination on-site review of serious deficiencies to ensure that insurance companies, following
the completion of an examination, have corrected deficiencies.

       As stated in the performance audit under Insurance Staffing Issues, the Financial Affairs
Section – Examination Unit is only able to perform statutorily mandated examinations on a
timely basis with current examiner resources. Given current examiner resources, follow-up
reviews may jeopardize the department’s statutory mandate to complete an examination as often
as once in five years, pursuant to Tenn. Code Ann. § 56-1-408.

        Six examiners who have recently been hired will take approximately three to five years to
train and qualify. The Department has not been able to conduct financial examinations more
frequently than five years due to the necessity to train these new examiners so that reliance can
be placed in the work they conduct.

Implementation of Recommendation for Insurance Division Finding 2:

        As the audit suggests, the department intends to implement an on-site examination follow
up process by July 1, 2003, with procedures that will give insurance companies a reasonable time
period to correct each serious deficiency. Successful implementation of this new process will be



                                               37
dependent upon an adequate level of examination resources, with the primary responsibility of
the examination remaining that the department meet the statutory mandate of Tenn. Code Ann. §
56-1-408 to examine each insurance company once every five years.



3. The division did not always ensure that insurance companies met all requirements
   related to deposits held for the protection of policyholders

                                             Finding

        Sections 56-2-103 and 56-2-104, Tennessee Code Annotated, require both foreign and
domestic insurers to maintain with the department the appropriate deposit, as determined by the
lines of business written within the state as well as whether the company is a foreign or domestic
insurer. (Foreign insurers are those companies with corporate headquarters in states other than
Tennessee; domestic companies are those based in Tennessee.) These deposits are to be held by
an appropriate custodian, as defined by Rule 0780-1-46, either in the form of cash or bonds, for
the protection of all policyholders and creditors in the United States. However, our review of
deposit-related documentation for a sample of 20 insurance companies indicated that the
Division of Insurance did not always ensure companies met all requirements. In addition,
although the division staff did apparently perform some reviews to determine whether securities
were acceptable, the division did not have a formal process to ensure that companies met (and
continued to meet) state and departmental requirements, as well as the requirements of their
individual depository agreements. Without such a process, policyholders and creditors may be at
greater risk if insurance companies experience financial difficulties.

        Securities considered acceptable as a deposit include U.S. government obligations,
obligations of the State of Tennessee or the state of domicile, and bonds rated within the top
three investment grades by any of the recognized securities rating firms (i.e., Moody’s or
Standard and Poor’s). A Division of Insurance staff person reviews securities received to
determine if they are acceptable. If this cannot be easily determined (for example, if the security
is not U.S. Treasury bonds or other easily identified security), staff may request assistance from a
division financial analyst. The analyst may then, for example, determine the investment grade of
the security through the use of the NAIC Web site. (Analysts do not have access to Moody’s or
Standard and Poor’s Web sites because the Division of Insurance has not paid to obtain
subscriptions to those Web sites.) There was, however, no evidence in the files that analysts had
conducted any further checks on any of the securities.

        Fifty-four (56.3%) of the 96 securities maintained for deposit by the 20 insurance
companies we reviewed were U.S. Treasury Bonds. Of the 42 securities that were not U.S.
Treasury Bonds, we determined, by using the NAIC Web site, that 25 (59.5%) were acceptable
(i.e., were rated within the top three investment grades). We were unable to determine the status
of the remaining 17 securities (40.5%). According to financial analysis staff, if an analyst is
unable to verify the grade of a security, the analyst makes no recommendation and advises staff
to consult the Director of Financial Affairs. Again, however, there is no evidence of further
review or discussion with the director in the files. An additional concern is that a security’s



                                                38
investment grade may change over the years. There is the possibility that a security which
fulfilled the investment grade requirement upon receipt no longer has a rating within the top
three investment grades. The Division of Insurance does not test securities after receipt to ensure
that the securities are still rated at an acceptable level.

        The Division of Insurance requires that securities for deposit have a minimum of a two-
year maturity date. We checked the securities maintained for deposit by the 20 insurance
companies we reviewed to determine whether they fulfilled this requirement. Of the 96
securities examined, 9 (9.4%) did not fulfill the minimum maturity date requirement. We also
checked the depository agreements to ascertain whether, for the period from January 1999 to
August 2001, those 20 companies were maintaining deposits at the specified level in their
agreements. The division does not maintain the spreadsheets detailing deposit data for all
months; however, such data were available for 19 months of the 32-month period reviewed.
Depository levels fell below the amount specified in the companies’ agreements 11 times (2.9%)
out of the possible 380 times (19 months for 20 companies). In addition, we found that one
insurance company did not have a current depository agreement on file with the Division of
Insurance. The division was alerted to this deficiency and remedied the problem.


                                        Recommendation

        Division of Insurance management should develop a formal process to ensure that all
securities maintained for statutory deposit meet all state and departmental requirements, as well
as any specific requirements in companies’ individual depository agreements.


                                    Management’s Comment

        We do not concur. Although the Insurance Division does not verify the value of each
security held by the division on an annual basis, each insurance company reviewed in this
performance audit, save 1 of the 20 reviewed, maintained a statutory deposit far in excess of the
statutory requirement. Additionally, the performance audit concluded that 17 of 42 non-Treasury
Bond securities could not be verified as to their rating (with a first three grade requirement). The
department’s review of the 17 exceptions revealed that 11 were considered by the NAIC to be
guaranteed by the full faith and credit of the United States Government, with all ratings being
automatic; five securities were state obligations or obligations of subdivisions thereof that were
either (a) rated by S&P or Moody, as indicated in the files, or (b) located on the NAIC Securities
Valuation Office system. The remaining security was a general obligation bond of the City of
Oak Ridge, Tennessee that was not rated; however, another City of Oak Ridge bond was rated by
the NAIC as class one.

       Based on the department’s review, it appears the insurance companies in question
maintained amounts that substantially exceed the statutorily required deposit amounts, and the
majority of the deposits are obligations of governments. Therefore, the department does not
believe that the annual verification of each security provides any materially greater protection for
policyholders, or that it would be an efficient use of Insurance Division’s resources.



                                                39
                Division of State Audit Rebuttal to Management’s Comment

        As acknowledged in the response, the Department of Commerce and Insurance does not
verify the value of each security held by the division on an annual basis. Although the
Department of Commerce and Insurance may not believe the annual verification of each security
provides materially greater protection for the policyholders of Tennessee, the failure of the
department to ensure that all deposits meet the requirements determined necessary by the
department and/or Tennessee Code Annotated, whether upon receipt of each security or on an
annual basis, represents a risk to the insurance companies’ Tennessee policyholders and
creditors.

        There are two depository levels involved in this finding: the statutory level and the level
set by the department and included in the depository agreement between the department and each
company. Although the levels of deposit for the companies exceed the statutory level, in 2.9%
of the instances we checked for the 19 months reviewed, the levels of deposit were less than the
levels per the agreements. Hence, in those cases, the department failed to ensure that the
companies were in compliance with their depository agreements, set by the department on a
case-by-case basis.

        With regard to the issue of the adequacy of the securities held in deposit, Section 56-2-
104, Tennessee Code Annotated, clearly states that the department may accept bonds of the
United States (United States Treasury Bonds), bonds of the State of Tennessee, or bonds of the
state of domicile for deposits, without ensuring that the bond is rated within the highest three
grades by any of the recognized securities rating firms. Bonds of any agency or instrumentality
of the United States and bonds publicly issued by any solvent institution created or existing
under the laws of the United States or any state thereof may also be accepted for deposit if rated
within the top three investment grades by any of the recognized securities ratings firms. We
requested information on the securities that were not U.S. Treasury Bonds to determine the rating
grade. The Financial Analysis Section was unable to determine the ratings for 17 (40.5%) of
those securities. Further, no documentation was presented for our review, in the files or
otherwise, attesting to the rating of these securities. Although the department now states that, de
facto, the securities were adequate, no documentation to support that assertion was presented.




4. The division should ensure that staff uniformly follow policies and procedures when
   conducting examinations of insurance companies or document their reasons for not
   following those procedures

                                             Finding

       According to Examination Section management, insurance company examinations are
conducted according to procedures established by the National Association of Insurance
Commissioners (NAIC) and contained in the Financial Conditions Examiners Handbook. The
handbook provides a comprehensive overview of the examination process; provides procedures
and forms; and specifies, at a minimum, the attributes, procedures, and forms that should be


                                                40
included in every examination as well as offering guidelines on the methods and approaches for
conducting examinations. Our review of examination working papers, however, indicated that
methods used in examination, documentation of items and procedure steps, and the depth of
examinations appear to vary depending on the examiner in charge of a particular examination.
Inconsistent application of policies and procedures governing the examination process could
hinder the Division of Insurance’s ability to detect, as early as possible, and take appropriate and
timely regulatory action against, those insurers in financial trouble and/or engaging in unlawful
and improper activities.

        Our review of the working papers of ten examinations performed by division examiners
reflects that methods used by each in-charge examiner differ widely. Organization of the
working papers varied considerably from examiner to examiner, thus making it extremely
difficult to locate documentation for required items and/or procedure steps. In three of the ten
examinations reviewed, the working papers did not contain documentation of all of the required
NAIC items and/or procedure steps. In two of the ten examinations reviewed, the examination
reports did not address all the matters specified by the Financial Conditions Examiners
Handbook as necessary to the performance and report of every examination. (Similar concerns
were also raised in the June 1992 performance audit of the Division of Insurance.) Overall, each
examination addressed the same issues. However, methods, depth of the examination, and
documentation of items and procedure steps appeared to depend upon the priorities of the in-
charge examiner.


                                        Recommendation

       Management of the Examination Section of the Division of Insurance should ensure that
examiners uniformly and consistently apply the policies and procedures set forth by the
Financial Conditions Examiners Handbook and that examiners document their reasons for not
following the handbook in specific instances.


                                    Management’s Comment

       We concur in part. The department agrees that any NAIC suggested guideline procedure
that has not been implemented by an examiner should be documented as to the reasons the
examiner did not perform the suggested guideline procedure.

        The department does not concur that examiners must always apply all NAIC suggested
guideline procedures in every examination. The NAIC Handbook is a guide to assist in the
examination process and requires sound judgment of qualified examiners to complete an
effective examination. The NAIC Handbook acknowledges that considerable judgment is
required of the examiner when utilizing the handbook; the utilization of particular procedures in
the handbook depends upon the size of the insurance company, the type of insurance company
being examined, and other factors. The NAIC Handbook states that the examiner may decide to
simplify the examination process if such simplification is consistent with sound examination
procedures. The NAIC Handbook also recommends that the examiner design his or her



                                                41
procedures based upon the examiner’s risk assessment, such procedures being developed
pursuant to the priorities set by the examiner-in-charge.

       Furthermore, the performance audit report stated that respecting three of the ten
examinations reviewed, the working papers did not contain documentation of all of the required
NAIC items and/or procedure steps. It should be noted that two of the three companies whose
examinations were reviewed are limited credit life reinsurers. These entities, owned by the
ceding insurers’ policyholders, are excused from regular examination under Tennessee Code
Annotated, Section 56-2-210, but may be examined whenever the commissioner deems it
prudent.

       In general, the examination procedures and work papers follow the NAIC suggested
guidelines regarding examination of insurance companies; however, examiners do not always
document the reasons why particular guideline procedures are not followed.

Implementation of Recommendation for Insurance Division Finding 4:

       The department plans to notify all examiners by memorandum that any NAIC Handbook
suggested guideline procedure that is not implemented should be documented, such
documentation stating the reasons the particular guideline was not followed.




5. The division has not been consistent in applying and documenting its insurance
   admissions process

                                           Finding

        As part of the process for permitting an insurance company to conduct business within
the state, division staff gather and discuss pertinent information about the company’s soundness
and ability to serve Tennessee policyholders. However, our review of insurance admissions files
for 12 companies indicated that the division was not always consistent in the information it
gathered. Furthermore, the files provided no explanation as to why some seemingly relevant
information was not obtained for some companies. The failure to obtain all pertinent
information for all companies could result in at-risk insurance companies being admitted,
thereby potentially endangering the policyholders of Tennessee. The division also did not
consistently document specific details concerning its admissions decisions, such as the reasons
for denials of admission.

        Title 56, Section 2 of Tennessee Code Annotated contains the general requirements for
insurance companies to conduct business within the state. No insurance company may
commence business until it has met the requirements for admission, shown that the company is
financially responsible, and received a certificate of authority to do business from the
Department of Commerce and Insurance. The Division of Insurance determines the financial
responsibility and the fulfillment of minimum requirements through the use of an insurance



                                              42
admissions application process that culminates in a committee meeting where the decisions
regarding admission are made. (The committee consists of senior Division of Insurance staff
from both the examination and financial analysis groups.) In the committee meeting, one of
three decisions is made regarding the applicant. A company may be “moved,” meaning it has
been approved for admission; it may be put on “hold” pending additional information; or the
application may be “denied.” In the case of a denial, the insurance company is alerted and given
the opportunity to withdraw its application.

        Prior to March 2001, the insurance admissions application process was a two-part
process, requiring those items outlined in the statutes plus other pertinent information gathered
by the Division of Insurance. In order to comply with the provisions of the Gramm-Leach-Bliley
Act, as well as National Association of Insurance Commissioners (NAIC) initiatives, the division
subsequently adopted the Uniform Certificate of Authority Application (UCAA). The purpose
of the UCAA, which requires considerably more information from insurance companies than the
previous process, is to make the application process more uniform among states and thus
simplify the process for insurance companies. However, in our review of the insurance
admissions files, the additional items required were only found sporadically within the files.

         We requested the insurance admissions files for 13 companies whose applications were
either “moved” or “held.” Companies that applied to do business within the state both before
and after the transition to the UCAA were included. The division was unable to locate one of the
files, so only 12 files were reviewed. It appears that the criteria employed by the Division of
Insurance to determine financial responsibility, as well as the fulfillment of minimum
requirements, are applied irregularly. Of the 12 files reviewed, two lacked a completed desk
audit performed by a financial analyst, two lacked the company’s AM BEST rating, three lacked
the certified annual statement, and one lacked NAIC information regarding regulatory actions.
Two files did not contain an actuarial opinion.

        The division has also been inconsistent in documenting the admissions decisions made
within committee meetings and the reasons for those decisions. In some cases, the reasons for
denial of admission were noted in the committee meeting notes; in other cases, the reasons may
be noted on the company’s information checklist, which, according to staff, may or may not be
kept by the division after the admissions process is completed. In addition, there was no
documentation of the votes on admissions decisions for any of the files we reviewed. Such
information may be important if a company that has been denied admission challenges the
decision or reapplies at a later time.


                                       Recommendation

        Division of Insurance management should ensure that, before companies are admitted to
do business in Tennessee, staff obtain and review all information required by the Uniform
Certificate of Authority Application, as well as other information deemed pertinent by
management. Staff should document reasons for exceptions to the normal process. In addition,
management should review the process for documenting admissions decisions and develop a
formal procedure to ensure that such decisions are adequately documented for all companies.



                                               43
                                   Management’s Comment

       We concur in part. The department agrees that documentation listed on the Insurance
Division’s admissions checklist was, in some instances, not consistently obtained. However, in
each of these instances, these inconsistencies were not pertinent to the review in question.

       In the performance audit report, it was noted that additional items required by the
Uniform Certificate of Authority Application [hereinafter the UCAA] were missing from the
Insurance Division’s admissions files. It should be noted, however, that the department agreed
to accept the UCAA application to make the application process more uniform among states.
The Division continues to base the application review on the requirements of the original
Tennessee application, not the UCAA. On each of the companies reviewed, the department
believes that the decisions made concerning these companies were accurate and appropriate.

       Each person attending the meeting currently takes notes at the admissions meetings. The
admissions analyst maintains notes of these meetings, so fairly comprehensive documentation of
the admissions meetings exists.

Implementation of Recommendation for Insurance Division Finding 5:

        The Financial Affairs Section – Analytical Unit now requires the admissions analyst to
complete the initial audit sheet on all completed company admissions. In addition, the Insurance
Division has reviewed the admission process and made improvements by compiling templates
and instructions to help the process be more consistent.

        Given the improvements that have been made in the Financial Affairs Section –
Analytical Unit since the review, the department does not intend to make further modifications to
the admissions process; however, the department intends to continue to review this process with
an eye towards making improvements that are efficient and effective.




Division of Fire Prevention - Bomb and Arson Section


         It appears that Bomb and Arson Section operations have improved substantially since the
section’s current director took over in 1998. Section staff and officials from outside the
department (e.g., the Tennessee Bureau of Investigation; the federal Bureau of Alcohol,
Tobacco, and Firearms; the Tennessee Valley Authority Police; and local arson investigators)
have been complimentary regarding the section’s level of bomb and arson investigative
expertise. In addition, funding received during 2002, related to homeland security and anti-
terrorism initiatives, has allowed the department to make further improvements. However, areas
still exist where improvements need to be made (or progress continued) in order to increase the
section’s effectiveness.




                                               44
6. Training and certification of Bomb and Arson special agents need improvement

                                              Finding

        We identified two basic weaknesses in special agents’ preparedness to handle their duties
investigating arson and bombings: 1) the lack of regular annual training relating to Peace Officer
Standards and Training (POST), and 2) the lack of supervisory-related training. (See also a
discussion on page 11 regarding the need for more individuals to become Certified Fire
Investigators.)

POST Training

        Although special agents had POST-related training for calendar years 1999 and 2000,
such training for 2001 was cancelled. According to the Director of Bomb and Arson, the reason
for the cancellation was budgetary constraints. Section 38-8-111, Tennessee Code Annotated,
requires local police officers “to complete each calendar year an in-service training course
appropriate to the officer’s rank and responsibility and the size and location of the officer’s
department of at least forty (40) hours’ duration at a school certified or recognized by the
[Tennessee Peace Officer Standards and Training] commission.” The Tennessee Peace Officer
Standards and Training Commission develops, plans, and implements law enforcement training
programs for all local law enforcement officers in Tennessee.

        Although state law enforcement agencies are not required to meet POST standards, the
Bomb and Arson Director indicated that he tries to keep special agents POST-certifiable as a
“good business practice,” following the example of the Tennessee Bureau of Investigation’s
training of its agents. According to the director, POST-related training helps avoid potential
lawsuits stemming from charges that agents were unprepared, for example, in cases of
questionable shooting deaths. Without such training, not only might the proficiency of special
agents be questioned, but the state’s potential liability could also increase. The section’s policies
and procedures do not have training requirements (see Finding 7).

        According to the Director of Bomb and Arson, using funding from the department’s
Homeland Security Initiative and from the U.S. Attorney’s Office, the section conducted a one-
week ATF-certified Post Blast/Bomb course in September 2002, for 22 of its special agents. The
course included night courses in judgmental firearms training and, by training during the day and
night, the section was almost able to make up for 2001’s missed POST-related training.


Supervisory Training

        Both the Director of Bomb and Arson and the TBI Deputy Director indicated that the
training provided by the Department of Personnel to their staff is inadequate in the area of
management skills. According to them, the training 1) is generic, 2) does not foster the ability to
strategically plan operations, and 3) does not provide supervisors with the skills to enable them
to manage two different projects simultaneously. The Director of Bomb and Arson stated that
lack of supervisory skills training increases the workload of upper management and impedes the



                                                 45
promotions of street-level investigators to supervisors. Although management at both agencies
were complimentary of supervisory training provided by the Tennessee Government Executive
Institute, that training is only available to senior managers. Special agents interviewed also
indicated a lack of emphasis on supervisory training.


                                       Recommendation

        The department should ensure that all Bomb and Arson special agents get 40 hours of
POST-related training every year. To enhance leadership skills, the department should make
available and require supervisory training for all levels of special agents. The department should
cooperate with the Department of Personnel in the development and implementation of such
training.


                                   Management’s Comment

       We agree in part. This was a two-part finding and will be addressed in the same
sequence as the audit report.

The Lack of Regular Annual Training to Peace Officer Standards and Training (POST).

        As set forth in the audit, State law enforcement officers are not required to be POST
certified but we believe it is a good business practice. Toward that end, our special agents have
received a minimum of 40 hours annually, with the exception of calendar year 2001. During that
timeframe the annual fall session was postponed as a direct result of the State’s budget crisis.
Eventually, the training was cancelled as the State prepared for a shutdown and the furlough of
employees. However, we were able to resume the 40-hour training in September 2002 and are
hopeful that 2001 was an anomaly. It is clearly our intention to provide this training every year,
in addition to semi-annual firearms training and other specialty courses.

The Lack of Supervisory-related Training.

        We concur. There is a lack of opportunities for law enforcement supervisors to receive
training that is specifically designed to meet the needs of their position. Furthermore, only one
of our three supervisors who directly oversees field operations has completed the Tennessee
Government Management Institute (TGMI). We will continue to nominate the two Special
Agents in Charge for future TGMI classes. However, since the audit, we have made some
progress in this area. All supervisors participated in a one-day session relative to the strategic
planning process, to include setting goals, establishing priorities and measuring performance of
law enforcement initiatives. With assistance from TBI, we were also able to receive no-cost
stress management training for our field supervisors and the leader of our Special Operations
Response Team. This course is designed exclusively for law enforcement managers and
provides them with skills to recognize special agents who may be experiencing burn-out from the
job or personal stress related issues that require our attention. Since this training, we have
recommended one street agent to attend this course and the feedback from his attendance was
positive.


                                               46
        Additionally, we maintain constant dialogue with our counterparts in TBI, ATF and the
FBI so that we can be aware of any supervisory training opportunities that become available in
the State.



7. Bomb and Arson policies and procedures are incomplete
                                            Finding
        The Bomb and Arson Section has incomplete policies and procedures governing its
operations. The Director of Bomb and Arson stated that he was in the process of updating these
policies and procedures, using those of the Tennessee Bureau of Investigation (TBI) as a model.
A comparison of the section’s policies and procedures with those of the TBI indicated that the
section lacks policies addressing several investigative and non-investigative areas. These
deficiencies are described in the tables below.

      Criminal Investigative Policy Areas Not Addressed by Bomb and Arson Policies

        Area                                   Related TBI Policies and Procedures
Operational planning to accomplish             TBI 601: Operation Planning
investigative objectives
Polygraph examinations                         TBI 602: Polygraph Examinations
Transporting prisoners to jail                 TBI 603: Prisoner Transport
Cases involving juveniles                      TBI 605: Investigative Procedures for Cases
                                                       Involving Juveniles
Searches and seizures of property              TBI 606: Criminal Process-Search and
                                                       Seizure
Making arrests                                 TBI 607: Criminal Process Arrest
Criminal investigation checklist(s) for arson  TBI 614: Criminal Investigation Checklist
and bombing investigations
Processing of complaints received by the      TBI 619: Receiving and Processing
section on alleged criminal activity                  Complaints of Criminal Activity
Use of surveillance and undercover equipment TBI 620: Surveillance and Undercover
                                                       Equipment
Collection and preservation of evidence       TBI 623: Collection and Preservation of
                                                      Evidence
Handling of confiscated weapons               TBI 625: Confiscated Firearms and Weapons
Use of drawings, photography, and video       TBI 642: Crime Scene Sketching
recording at crime scenes                     TBI 644: Crime Scene Photography and
                                                      Video Recording
Proper use of state-issued cellular phones    TBI 916: Cellular Phone Usage




                                               47
        Non-Investigative Policy Areas Not Addressed by Bomb and Arson Policies

                      Area                      Related TBI Policies and Procedures
Training, including POST standards,             TBI 300: Orientation (In-Processing)
orientation of new agents, selection of         TBI 401-410: Staff and Career Development
instructors, and remedial training to correct
deficiencies in job skills and knowledge
Property inventory and inspection, including    TBI 104: CALEA Accreditation
regular accounting of property and inspection   TBI 501: Property Inventory
of critical equipment (e.g., uniforms,
vehicles, weapons)
Performance evaluations and related             TBI 319: Employee Performance Evaluation
grievance process                               TBI 321: Grievance of Performance Evaluations
Cooperation with other bomb and/or arson        TBI 102: Mutual Aid
agencies (e.g., local and federal)
Internal affairs, including investigation of    TBI 345: Internal Affairs Function
alleged misconduct by agents and related
disciplinary actions
Chain of command, including input of field      TBI 100: Director’s Authority and Responsibility
agents on investigative operations              TBI 109: Unity of Command
Oath of office                                  TBI 101: Oath of Office
Staff meetings, including discussion of cases   TBI 103: Staff Meetings
Goals and objectives                            TBI 112: TBI Goals and Objectives
Professional conduct, including proper          TBI 301: Standards for Employee’s Conduct
personal appearance and proper use of           TBI 303: TBI Credentials
identification                                  TBI 350: Personal Appearance
Secondary employment                            TBI 305: Secondary Employment
Disciplinary action                             TBI 323: Disciplinary Action
                                                TBI 324: Dismissals
Promotions                                      TBI 335: Promotion
Fitness for duty, including peer support        TBI 336: Fitness for Duty
counseling
Background investigations for section staff     TBI 339: Background Investigations
Use of vehicles                                 TBI 502: Use of Bureau Vehicles

        An additional issue that needs to be addressed in the section’s policies and procedures is
the handling of jurisdictional disputes between local police and fire departments during arson
investigations. Department staff and local arson investigators interviewed indicated that
jurisdictional disputes are, to a varying degree, a problem. State fire marshal officials in other
states also indicated some problems in this area. Jurisdictional disputes include disagreement
over which local agency conducts an arson investigation and the removal of bodies by fire
departments before police departments have time to investigate, thus contaminating crime
scenes. Department staff and a local arson investigator indicated that better training of local fire
and police departments on arson investigations could help prevent such disputes (see finding 8).
According to Arson in the United States (1997), by the U.S. Fire Administration, “It is widely



                                                48
held that arsonists stand more of a chance of getting caught and convicted if fire and police
investigators work together on investigating fires.”

        Complete and updated policies and procedures are crucial for the consistent and effective
conduct of investigative operations. The local ATF Special Agent In-Charge stated updated
policies and procedures are “a must” and that “Law enforcement is difficult enough; without
proper direction it will be deadly.” According to the TBI Deputy Director,

       Policies are something that must be constantly revised to take into account
       changing procedures and policies with courts, as well as improvements in the
       areas of technology and evidence handling. Following outdated policies can
       literally result in the dismissal of your case, based on old case law, or improper
       handling procedures of evidence, as well as utilizing obsolete or ineffective
       technology. In addition, failure to have adequate policy can result in civil
       liability, both to outside individuals, as well as members of your own agency.


                                       Recommendation

        The department should update Bomb and Arson Section policies and procedures so that
special agents are properly guided in their investigations and can adequately resolve
jurisdictional disputes among local investigative agencies.


                                   Management’s Comment

        We concur in part. We fully agree that our policies and procedures are incomplete and
we are indebted to TBI for allowing us to use their manual as a guide. However, we do not agree
that all policies required by TBI, as a separate entity, are required by the Bomb and Arson
Section that is governed by departmental policy. For example, TBI Policy Number 916
established procedures for Cellular Phone Usage. To develop a separate policy within the Bomb
and Arson Section would be duplicative of a department wide policy already in place. Yet, that
policy is listed in the findings as one not currently addressed by this section.

        However, since the audit was conducted, much progress has been made in this area. The
Bomb and Arson Section currently has 39 policies in place with others in the final draft for
review. We have identified approximately 20-25 additional policies that need to be incorporated
in our manual. Our goal is to complete this task by June 30, 2003. As an aside, the finding also
draws a nexus between having policies in place and resolving jurisdictional disputes among local
investigative agencies. Historically, there have consistently been “turf” issues between fire
service and law enforcement on a nationwide basis that often surface during the response to the
scene of a suspected arson. It would be rare for these disputes to relate in any way to a State
agency’s lack of policies and procedures inasmuch as local agencies are not governed by the
State Fire Marshal’s Office. However, our special agents are accustomed to these types of issues
and work to ensure that all agencies involved in the investigation work in harmony so that the
investigation can be successfully completed.



                                               49
8. Arson-related training for local fire and police departments needs improvement

        Although the Bomb and Arson Section did offer such training to local fire and police
department staff in 2000 and 2001, both section staff and local investigators indicated that more
training is needed. A local director of the International Association of Arson Investigators
(IAAI) and a Tennessee Valley Authority Police Inspector specializing in arson also indicated
such a need. Thirty-two local investigators in 2000 and 19 investigators in 2001 were trained in
classes developed by the section. One local investigator, although praising the training, indicated
that more was needed because of new technologies arsonists are using to prevent detection and
because of new bomb threats as a result of the September 11, 2001, incidents in New York and
Washington, D.C.

        Investigations involving suspected arsons are, in most locations in the state, handed off to
state investigators because of lack of local expertise. Local investigators must first, however, be
able to detect evidence of arson. One special agent stated that many of these investigators are
afraid of categorizing a fire as suspected arson because they are not adequately trained to know
what to look for. The large number of volunteer fire departments compounds the problem of
lack of investigative expertise. Effective detection by local investigators is important, however,
because the section does not have the resources to investigate every suspicious fire in the state.
The Director of Bomb and Arson indicated that a major purpose of training is to reduce the
number of cases that special agents have to investigate. High-priority cases for special agents
include suspicious fires or explosions with fatalities or injuries. Low-priority cases include
suspicious fires involving vehicles or single out-buildings.

        The IAAI Director indicated that arson is especially a problem during times of economic
difficulty (for example, individuals cannot make mortgage payments on buildings and thus burn
them to get money from insurance companies). According to Arson in the United States, “The
main factors that influence the ‘winnability’ of an arson case rest with how the fire incident is
handled at the beginning and the end of the case . . . if fire department personnel do not properly
identify a suspicious fire, then an investigation that could uncover arson never occurs.”

        Using funds from the anti-terrorism task force initiative, the Bomb and Arson Section
was able, in 2002, to provide training to 24 local police and fire investigators, at little or no cost
to the local agencies. In addition, the section provided its 16-hour First Responder course to 58
individuals, through its Knoxville and Jackson offices.



                                         Recommendation

        The department should determine the need and demand for particular types of bomb and
arson training for local fire and police department personnel by surveying such personnel and by



                                                 50
 inquiring how other states are meeting similar training needs. The department should then take
 steps to provide this training.


                                     Management’s Comment

         We concur. In order for the Bomb and Arson Section to continue to focus its attention on
 high priority cases, it is essential that training be administered to local departments. Thus far, in
 the past three years we have conducted two 2-week courses at the Tennessee Law Enforcement
 Training Academy (May 2000 and April 2001). Approximately 70 State and local law
 enforcement officers were trained in these two sessions. A third class was scheduled for April
 2002 but was cancelled by the Academy due to lack of training funds throughout the State
 resulting in a low number of applications. We plan to continue this training.

        We are also continuing our 16-hour first responder course that is designed principally for
 volunteer fire fighters. However, these courses must be conducted at nights and on weekends, to
 meet these volunteer’s schedules, and thus consume overtime appropriations. Further, we are
 coordinating with the Tennessee Fire Service and Codes Enforcement Academy and providing
 special agent/instructors to teach portions of courses that deal specifically with first
 responders/arson issues.




9.   Case files and conversations are not properly secured

                                               Finding

         Information concerning Bomb and Arson Section cases in paper files and in related
 conversations is not secured at the central and field offices. Information in paper files is not only
 unprotected from intentional and unintentional damage or destruction, but also is not easily
 retrievable. Implementation of the AIMS 2000 computerized case management system will
 eliminate the need for paper files to store case information, according to section management
 (see page 13). However, restricting access to areas where case information is stored or can be
 retrieved (i.e., computer terminals) to authorized personnel will still be needed. In addition,
 sensitive conversations regarding ongoing cases are not always conducted in enclosed rooms.

 Paper Case Files

         The Director of Bomb and Arson described security of case files as “terrible.” The case
 file room at the central office does not have floor-to-ceiling walls (the walls end approximately 2
 ½ feet from the ceiling) so anybody can climb into the room. In addition, the door can easily be
 forced open. Several file cabinets do not have locks or have locks that are either broken or
 whose keys are missing. The director indicated that an ideal and reasonably affordable security
 system for such files should include, at a minimum, floor-to-ceiling walls and limited access




                                                  51
(including locked doors). Mesh above the ceiling of the secured area would also be useful, as it
would help prevent access from above.

        The Deputy Director of the Tennessee Bureau of Investigation (TBI) also indicated that
such security measures are needed for the protection of case files. The Commission on
Accreditation for Law Enforcement Agencies (CALEA) requires the TBI to have such security
for its case files. According to CALEA’s Standards for Law Enforcement Agencies, “The
agency should determine the physical security requirements for the facility and decide who is
authorized to access agency files. Facility and file security ensure the integrity of the system and
the information it contains.”

       Section management stated that the paper files are not backed up in a remote location.
According to the State of Tennessee Business Resumption Planning: A Guide for Executive
Branch Agencies, as part of the department’s Business Resumption Plan, the section needs to
have duplicate files in a different secure location in case files at the central office are destroyed.
The guide states, “The primary objective of a Business Resumption Plan is to enable an
organization to survive a disaster and to reestablish normal business operations.” Disasters
include those of nature (e.g., earthquakes and severe weather), fires, and terrorism.

        Although with the implementation of AIMS 2000 new case files will be backed up
electronically, information in existing paper files is still valuable in tracing the criminal history
of specific suspects. However, information retrieval from paper files is difficult. Such
information has to be retrieved by hand, and one needs a specific timeframe regarding when the
case occurred to avoid having to look at several pages of a case log or several case logs.
Suspects or other parties to a case (e.g., witnesses) are not individually indexed so a special agent
could not easily determine what other bombing or arson cases they had been associated with.

       The director stated that he planned to add summary information—case numbers, dates,
general descriptions, witnesses, and locations—concerning cases in the approximately 5,000
paper files (as of July 2001) into AIMS 2000. However, he did not plan to add complex
information, like chronologies of events, because of lack of staff. Once the case files are sent to
archives, such information will not be readily accessible.

Confidential Conversations

        The only enclosed rooms at the central office are the director’s and assistant director’s
offices. The special operations room is located in the paper file storage area, and conversations
in that room (which have the same low walls as the rest of the area) can easily be overheard by
individuals near that room. For example, the director told of an incident where an individual of
another section overheard a conversation between a female special agent, who at the time was
working undercover, and the Special Operations Response Team (SORT) team leader. That
individual innocently asked how the investigation was going. The inadvertent leaking of
sensitive information concerning investigations could potentially impair such investigations and
endanger special agents. The director had written a memorandum to the commissioner in August
2000 concerning this problem but it was not acted upon.




                                                 52
                                        Recommendation

         Department management should assess the level of access to the Bomb and Arson
Section’s office space and case information, and take action (e.g., providing adequately enclosed
facilities) to ensure restricted access to both sensitive documents and case-related conversations.
Staff should be careful when discussing investigations and take precautions to help ensure that
unauthorized individuals do not overhear case-related conversations. The department should
transfer all valuable investigative information in paper case files to AIMS 2000.


                                    Management’s Comment

       We concur. Physical security can be improved in the Bomb and Arson Section. There is
a need to better secure the file room where all open and closed criminal investigative files are
maintained. Similarly, there is a need to reinforce the security in two adjacent rooms where
evidence, sensitive surveillance equipment and weapons are stored. And finally, there needs to
be a secured “squad room” area for special agents to discuss and plan on-going investigations,
obtain secured Fax’s from TBI, FBI, ATF, etc. and to work on investigative reports for
presentations to the District Attorney and/or grand jury.

         In order to become compliant with this finding, we will develop a plan to improve
security for the Bomb and Arson Section. The Department will work with the Departments of
Finance and Administration and General Services to develop appropriate measures and seek to
prioritize available funds to ensure the Bomb and Arson Section resides in a secured
environment.




Division of Fire Prevention – Administrative Services Section

10. The majority of fire departments do not report fire incident data to the Tennessee Fire
    Incident Reporting System and the division has no authority to enforce such reporting

                                             Finding
        As of September 2001, only a third of Tennessee’s 663 fire departments reported fire
incident data to the Tennessee Fire Incident Reporting System (TFIRS). TFIRS is used to collect
data as part of a local, state, and federal coordinated effort to create a national database on fire
incidents. This national database, called the National Fire Incident Reporting System (NFIRS),
is managed by the U.S. Fire Administration and facilitates comparison of fire incidents among
states. Tennessee Code Annotated does not specifically require fire departments to report data to
TFIRS and the Division of Fire Prevention has no authority to force fire departments to report.
Reporting of fire incident data is important, however, because it can help the division identify
departments or areas needing additional training, technical assistance, and fire prevention




                                                53
education. In addition, some federal fire prevention grants to Tennessee could be negatively
impacted if fires are underreported.
         According to department staff, the fire departments reporting to TFIRS account for an
estimated 50 percent of the state’s population. However, some major fire departments (e.g.,
Knoxville) were not reporting. In addition, Nashville has apparently not provided useable data
since 1996 because of software problems. (Fire departments may submit data on paper, on
floppy disk, or as a data file via e-mail, or they can key reports individually or import the file
into the TFIRS database.) Exhibit 3 indicates county participation in TFIRS. Appendix 2
indicates participating and nonparticipating fire departments within each county. (Data for 2002
was not available during our audit fieldwork; however, according to staff, the number of
reporting departments has not dramatically increased since that time.) Department staff believe
that, although only one-third of fire departments report to TFIRS, the sample gathered is large
enough so that information in the database, such as causes of fires (by percent) provides a
reasonable estimate of the causes of fires statewide. Table 7 shows the number and percentage
of reported fires by cause, while Table 8 defines each type of cause. The staff believe that the
high percentage of “unknown” is the result of the lack of training of volunteer fire department
personnel in determining the causes of fires. (see Finding 8).

                                        Table 7
               Causes of Residential Fires and Deaths Reported to TFIRS
                               Calendar Years 1998-2000
                                                 Fires               Deaths
 Cause                                          (9,938)               (111)
 Exposure                                        4.0 %                1.8 %
 Incendiary/Suspicious                          11.1 %                9.0 %
 Children Playing                                2.9 %                1.8 %
 Natural                                         2.1 %                1.0 %
 Smoking                                         3.9 %                5.4 %
 Heating                                         8.5 %                7.2 %
 Cooking                                        17.4 %                4.5 %
 Electrical Distribution                         8.8 %                8.1 %
 Appliances                                      5.6 %                7.2 %
 Other Equipment                                 0.7 %                0.9 %
 Open Flame, Spark                               4.8 %                5.4 %
 Other Heat                                      1.9 %                2.7 %
 Unknown                                        28.3 %               45.0 %




                                               54
                                           Table 8
                                         Causes of Fire
         Cause                                              Definition
 Exposure                  Caused by heat spreading from another hostile fire
 Incendiary/Suspicious     Fire deliberately set or suspicious circumstances
 Children Playing          Includes all fires caused by children playing with any materials
                           contained in the categories below
 Natural                   Caused by sun’s heat, spontaneous ignition, chemicals, lightning,
                           static discharge
 Smoking                   Cigarettes, cigars, pipes as accidental heat of ignition
 Heating                   Includes central heating, fixed and portable local heating units,
                           fireplaces and chimneys, water heaters as source of heat
 Cooking                   Includes stoves, ovens, fixed and portable local warming units, deep
                           fat fryers, open grills as source of heat
 Electrical Distribution   Includes wiring, transformers, meter boxes, power switching gear,
                           outlets, cords, plugs, lighting fixtures as source of heat
 Appliances (including     Includes televisions, radios, phonographs, dryers, washing machines,
 air conditioning/         vacuum cleaners, hand tools, electric blankets, irons, electric razors,
 refrigeration)            can openers, dehumidifiers, water cooling devices, air conditioners,
                           refrigeration as source of heat
 Other Equipment           Includes special equipment (radar, x-ray, computer, telephone,
                           transmitters, vending machine, office machine, pumps, printing press),
                           processing equipment (furnace, kiln, other industrial machines),
                           service, maintenance equipment (incinerator, elevator), separate motor
                           or generator, vehicle in a structure, unspecified equipment
 Open Flame, Spark         Includes torches, candles, matches, lighters, open fire, ember, ash,
 (heat from)               rekindled fire, backfire from internal combustion engine as source of
                           heat
 Other Heat                Includes fireworks, explosives, heat or spark from friction, molten
                           material, hot material, all other fires caused by heat from fuel-powered
                           objects, heat from electrical equipment arcing or overloading, heat
                           from hot objects not covered by above groups
 Unknown                   Cause of fire undetermined or not reported
Source: U.S. Fire Administration, Federal Emergency Management Agency.




                                                55
                                                                                                                                                      Exhibit 3

                                                        Counties Participating in the Tennessee Fire Incident Reporting System
                                                                                    September 2001



                                                                                                                                                                                                                                                                                                                             Sullivan
                                                                                                                                                                                                          Pickett                                                                          Hancock
                                                                                                                                                                    Macon               Clay                                                                          Claiborne
                                                                                                                            Robertson                                                                                                                                                                  Hawkins                                   Johnson
                                                                                           Stewart      Montgomery
                                                                                                                                                                                                                                       Scott                                                                          Washington
                                                                                                                                             Sumner
                                                                                                                                                                                                                                                    Campbell                                                                            Carter
                                                                                                                                                               Trousdale                                             Fentress
                                   Obion                                                                                                                                          Jackson          Overton
                                                                                                                     Cheatham                                                                                                                                     Union       Grainger
                       Lake                                              Henry
                                                      Weakley                                Houston                                                                                                                                                                                       Hamblen
                                                                                                                                                                      Smith                                                                                                                                  Greene
                                                                                                                                                                                                                                                                                                                         Unicoi
                                                                                                                                 Davidson                                                   Putnam                               Morgan          Anderson
                                                                                                           Dickson                                    Wilson
                                                                                                                                                                                                                                                                              Jefferson
                                                                                  Benton
                           Dyer                                                                                                                                                                                                                                Knox
                                             Gibson                                        Humphreys                                                                        De Kalb                                                                                                                  Cocke
                                                                                                                                                                                               White             Cumberland
                                                                    Carroll
                                                                                                                         Williamson                                                                                                    Roane
                                                                                                                                               Rutherford                                                                                                                         Sevier
                                                                                                                                                                   Cannon
                                  Crockett                                                             Hickman
                                                                                                                                                                                            Van Buren                                            Loudon
              Lauderdale                                                                                                                                                                                                                                        Blount
                                                                                                                                                                               Warren
                                                                                                                       Maury                                                                                            Rhea
                             Haywood           Madison          Henderson                   Perry
                                                                                                                                                                                                       Bledsoe
         Tipton                                                                  Decatur                Lewis
                                                                                                                                                Bedford            Coffee
                                                                                                                                                                                                                                     McMinn       Monroe
                                                          Chester                                                                Marshall                                        Grundy                                  Meigs
                                                                                                                                                                                                Sequatchie
                                                                                                                                                      Moore
                                                                                            Wayne
     Shelby            Fayette         Hardeman                                                          Lawrence        Giles
                                                           McNairy            Hardin                                                                                                                      Hamilton         Bradley
                                                                                                                                            Lincoln              Franklin             Marion                                              Polk




                                                                                                                                                                                                                                                                County Participation
                                                                                                                                                                                                                                                                             No reporting
                                                                                                                                                                                                                                                                             Partial reporting
Source: Department of Commerce and Insurance.                                                                                                                                                                                                                                Complete reporting




                                                                                                                                                                56
         According to division staff, many states require such reporting and some states, such as
Kentucky and Maryland, have provided financial incentives to improve participation rates.
Information from computerized fire incident reporting systems is important in targeting fire
prevention education efforts and in helping identify training needs for firefighters in particular
locations. According to staff of the National Fire Prevention Association (a nonprofit
organization whose mission is to reduce fire hazards), information about accidental fire deaths is
vital in raising awareness among community leaders and motivating them to find solutions.


                                       Recommendation

       The department should take steps to increase TFIRS participation by fire departments,
including educating them on the usefulness of fire incident data in fire prevention, and providing
technical assistance (e.g., regarding software compatible with TFIRS).

       The General Assembly may wish to clarify language in Section 68-102-111, Tennessee
Code Annotated, to require fire departments to report fire incident data to TFIRS at least
annually.


                                   Management’s Comment

        We concur. However, at the present time, fire departments are not mandated by law to
report data to the Tennessee Fire Incident Reporting System (TFIRS). While it is still true that a
majority of fire departments do not report to TFIRS, considerable progress has been made since
September 2001. By the end of 2001, there were 262 out of 663 departments reporting data.
The 1997-2001 average was 206 departments per year reporting data. Due to reorganization, the
total number of departments in 2002 has risen to 681. Although 2002 data is incomplete, the
number of reporting departments should be at least as many as in 2001, due to the grant program
discussed below. Also, Knoxville began reporting in December 2001, and Nashville is switching
to the same software that Knoxville has been using successfully.

       An encouraging development to help accelerate TFIRS reporting is at the Federal level.
As part of the Firefighter Investment and Response Enhancement (FIRE) Act, the Federal
Emergency Management Agency (FEMA) administers the Assistance to Firefighter Grant
Program. The FEMA grants require fire incident reporting by each recipient. As of December
23, 2002, there were 178 Tennessee departments that received a total of $11,231,971 in awards.
Of these 178 departments, there were 103 that did not report in 2001, but must now participate.

        This is the second year of the program. If it continues, a considerable number of non-
reporting departments may be brought into TFIRS, since the awards are quite attractive. Because
fire and rescue agencies are the local line of defense in the event of a national emergency, we are
hopeful that the grant program will continue as part of a comprehensive homeland security
strategy. Congress is authorized to award up to $900 million in 2003, but has not yet
appropriated the funds.




                                                57
11. The department needs to implement a formal, comprehensive fire-prevention education
    program

                                                 Finding

       The department does not have a formal, comprehensive fire-prevention education
program. Staff indicated that education efforts are informal in nature and included activities
such as occasionally providing fire-prevention education in schools, referring requests for such
education to local fire departments, and, if requested, providing brochures on fire prevention.

        According to U.S. Fire Death Patterns by State (March 2001) by the National Fire
Protection Association, Tennessee ranked fourth in the country in 1998 in fire deaths per million
people while the state ranked third for the 1994-98 average. Although Tennessee fire death rates
dropped by more than a fourth from 1980 to 1997, Tennessee’s ranking went from 12th in the
nation to 3rd highest. An August 2002 edition of the publication indicated that Tennessee’s
1995-99 average fire death rate per million was 26.5, again third highest nationally. Tennessee’s
high ranking is attributed, at least in part, to the fact that Tennessee ranks high on three factors
found to be related to fire deaths—poverty, low educational attainment, and smoking. Another
factor is the high percentage of population in rural areas, which is typically associated with
poverty. Department staff also indicated that poorly maintained heating units are a major cause.
Many people tend to not properly maintain these units because of Tennessee’s mild winters.

        Public fire prevention education does appear to work in reducing accidental fire deaths.
For example, educational efforts in South Carolina (including the installation of smoke detectors
throughout the state) greatly reduced fire deaths, from 189 in 1986 to 79 in 1999. Fire
Prevention staff in Tennessee confirmed that education efforts regarding smoke detector use
would have a substantial effect on reducing deaths. Information from the Tennessee Fire
Incident Reporting System (TFIRS) indicates a strong relationship between smoke detector use
and fatalities. Seventy-five percent of all fire deaths occur in structures with no smoke detectors.
Furthermore, fatalities are reduced in half when smoke detectors are present and functioning.

       According to Arson in the United States, educational efforts can even reduce incidents of
arson by juveniles. Lack of supervision is a major cause of children setting fires.

       Parents, especially single mothers and other parents facing significant child care
       obstacles, should be provided with information verbally and in writing about the
       dangers of leaving children alone, the importance of keeping matches and lighters
       out of sight and out of reach, and the signs of firesetting behavior and stress in
       school-age children.




                                                58
                                        Recommendation

       The department should develop and implement a formal, comprehensive fire-prevention
education program. Information from TFIRS on the causes of fire deaths in specific locations
should be used to target educational efforts.


                                    Management’s Comment

        We concur. Due to budgetary constraints, the Public Fire Information Officer position
was vacant during the audit period. However, the position was filled October 2002. We feel the
way to best utilize this position is to be able to furnish the local fire departments with fire
prevention materials and education (videos, brochures, coloring books, etc.) so that they can, in
turn, teach their communities fire safe behaviors.

       The Division also annually sponsors a statewide Fire Prevention Poster Contest for
school age children in which a fire safe behavior theme, chosen by the National Fire Protection
Association (NFPA), is emphasized. We believe this program is crucial in motivating children to
develop and practice fire safe behaviors that can make a difference between life and death in a
fire. On Sunday, January 12, 2003, we hosted an award’s luncheon attended by approximately
90 individuals including poster contest winners, family members and fire service personnel.
During the ceremony, in addition to the poster contest winners, the Public Fire Educator of the
Year was honored.

       The Division also partners with NFPA, local fire departments and other agencies to
implement the “Risk Watch” curriculum in the schools across the state. Risk Watch is a
comprehensive injury prevention curriculum developed by NFPA, with co-funding from the
Lowe’s Home Safety Council. It addresses the eight risk areas that kill or injure the most
children each year: motor vehicle crashes; fires and burns; choking, suffocation, and
strangulation; poisonings; falls; unintentional firearms incidents; bike and pedestrian hazards;
and water hazards. Risk Watch gives children the information and practice they need to
recognize and avoid risks. At the present time there are nine counties in Tennessee that have the
Risk Watch curriculum in their schools.

        The audit finding states that lack of supervision is a major cause of children setting fires.
We are also aware of this problem and, as a result, are taking steps to be of assistance to fire
departments and schools in their efforts to reduce juvenile fire setting. The Public Fire
Information Officer attended a Juvenile Firesetter Intervention Conference in Greenbelt,
Maryland in January 2003, in order to learn about the uniqueness, successes, and the difficulties
that intervention teams from other countries are having in their struggles to mitigate the
worldwide problem of juvenile firesetting.




                                                 59
Division of Fire Prevention - Electrical Inspection Section

12. The Electrical Inspection Section does not periodically review the competency of the 20
    cities/counties granted exemption from state electrical inspections

                                            Finding

        The department’s Electrical Inspection Section contracts with electrical inspectors
throughout the state to perform inspections to ensure that structures comply with the state’s
electrical codes. Pursuant to Section 68-102-143(b)(1), Tennessee Code Annotated, the State
Fire Marshal may authorize municipalities to perform their own electrical inspections and,
thereby, be exempt from the state inspections. Entities requesting exemptions must show that
they have adopted, and can enforce, electrical standards that are at least as stringent as those
established by the state.     Twenty entities—Metro Nashville, Memphis/Shelby County,
Chattanooga/Hamilton County, Knoxville, Kingsport, Johnson City, Elizabethton, Morristown,
Maryville, Athens, Oak Ridge, Sparta, Jackson, Humboldt, LaFollette, Bartlett, Collierville,
Millington, Lookout Mountain, and Watauga—are exempt and have held these exemptions since
at least 1984. The Electrical Inspection Section, however, does not periodically review the
exempt entities’ operations to ensure that their standards and their inspection programs are
adequate.

        In addition to having no process to periodically verify the exempt entities’ competency to
perform their own electrical inspections, section management could provide no documentation
detailing exactly when the exemptions were granted, what documentation was provided in order
to gain the exemptions, or whether the exemptions were granted for a specific period of time.
Without oversight and periodic verification of the competency of exempt entities to perform their
own electrical inspections, the department cannot ensure that electrical codes are being enforced
and that structures are safe for inhabitants.


                                       Recommendation

     The department should develop rules and regulations to institute regular periodic
verifications of exempt entities to ensure that such entities have the manpower and technical
knowledge to enforce state-required electrical codes. Department management should also
review current statutory language and, if necessary, prepare proposed legislation for
consideration by the General Assembly, to clarify what local governments must do to justify
exemptions. In developing rules and regulations and/or preparing proposed statutory language,
the department may wish to adopt language similar to that in existing statutes, rules, and
regulations concerning building construction safety standards.




                                               60
                                      Management’s Comment

       We concur with this finding. The Electrical Inspection Section is coordinating with
Legal Counsel in promulgating rules to implement the provisions of Tennessee Code Annotated,
Section 68-102-143. When rules have been promulgated, procedures will be established to
ensure that exempt jurisdictions are audited every three years, to the extent of available human
resources, to ensure that they are performing their enforcement functions appropriately, as
required by statute.



Division of Fire Prevention - Codes Enforcement Section

13. The Codes Enforcement Section is not performing the required audits of the local
    governments granted exemptions from state building and fire codes

                                             Finding

        The State Fire Marshal establishes and enforces statewide building construction safety
standards. By law, local governments can request, and receive, an exemption from these
standards if they certify in writing that they have adopted certain building codes (see below) and
are adequately enforcing those codes (i.e., through inspections), including performing required
reviews of construction plans and specifications. The Codes Enforcement Section is not,
however, auditing the records and transactions of these local governments to ensure that they are
adequately performing their enforcement functions, as required by Section 68-120-101(b)(3)(A),
Tennessee Code Annotated. (This provision does not apply to any county having a metropolitan
form of government and a population of 100,000 or more in the 1990 or any subsequent federal
census.) The statute, which went into effect in 1992, requires the audits to be conducted at least
every three years. Without on-site audits of exempt entities, the department cannot be sure that
such governments are adequately enforcing minimum building and fire codes. In addition, as the
state is ultimately responsible for the enforcement of such building and fire codes, the lack of
oversight could have potential legal ramifications.

        Currently there are 31 exempt entities (with exemption dates as early as 1982 and as
recent as 2001). Entities are listed in order of exemption date:
        Alcoa               Pigeon Forge          Bartlett           Brentwood
        Johnson City        Kingsport             Shelby County      White House
        Maryville           Chattanooga           Paris              Lebanon
        Sevierville         Hendersonville        Knox County        Cookeville
        Clarksville         Bristol               Jackson            Millington
        Knoxville           Collierville          Franklin           Goodlettsville
        Madison County      Gatlinburg            Athens             Montgomery County
        Oak Ridge           Davidson County       Murfreesboro



                                               61
       The original exemption application requires the applicant to show the following:

       •   adoption of versions of the Standard Building Code and either the Standard Fire
           Prevention Code or National Fire Code that are within six years of the latest
           published edition;
       •   any local ordinances amending the adopted codes;
       •   whether referenced codes or standards are enforced;
       •   types of occupancies requiring plans review and approval;
       •   whether written records are kept of reviews and inspections;
       •   personnel responsible for enforcing codes;
       •   whether alternatives to codes are permitted and documented; and
       •   whether concurrent reviews and inspections are performed on state-owned buildings,
           educational, and day care occupancies.

        Current section procedures also require that, prior to granting an exemption, staff conduct
a site visit to review documents and conduct an inspection of a building previously inspected by
the local entity. Section management could not verify, however, that these site visits were
actually conducted for all entities. Once granted, exemptions remain in effect as long as the
entity has adopted codes that are within six years of the latest published code and has a review
and inspection program that is adequately performing its duties. Current section oversight is
limited to requiring exempt governments to fill out a survey questionnaire when new codes are
adopted. New rules went into effect on August 26, 2001 and, after a survey of all exempt
entities, all entities retained their exempt status.


                                       Recommendation

        The department should develop procedures for effectively auditing entities exempted
from state building and fire code inspections at least every three years as required by statute, to
ensure that such entities are performing their enforcement functions appropriately.


                                   Management’s Comment

       We concur with this finding. The Codes Enforcement Section is coordinating with Legal
Counsel in promulgating rules to implement the provisions of Tennessee Code Annotated,
Section 68-120-101(b)(3)(A). When rules have been established, procedures will be established
to ensure that exempt jurisdictions are audited every three years, to the extent of available human
resources, to ensure that they are performing their enforcement functions appropriately, as
required by statute.




                                                62
14. Some Codes Enforcement and Deputy Electrical Inspectors’ personnel files lack
    necessary documentation

                                            Finding

       We reviewed personnel files for Codes Enforcement staff (who are state employees) and
Deputy Electrical Inspectors (who contract with the department to perform electrical inspections
throughout the state). Some of the personnel files reviewed lacked information such as (1)
documentation showing that those persons meet the minimum qualifications required for their
job classification; (2) a state application—applicable for Codes Enforcement personnel only;
and/or (3) an annual evaluation. The lack of such documentation could indicate the existence of
employees (state or contract) who do not have adequate qualifications to perform their jobs, as
well as a failure by management to adequately oversee the hiring, performance, and training of
employees.

        A review of Codes Enforcement personnel files found that 11 of 51 files (22%) lacked
evidence the employee meets minimum job requirements; 10 of 51 (20%) lacked a state
application; and 11 of 43 files (26%) of persons eligible for a fiscal year 2000 evaluation lacked
such an evaluation. Our review of Deputy Electrical Inspectors’ personnel files indicated
weaknesses in documentation of certifications. Specifically, the files for 2 inspectors contracted
with since March 1, 1999 and the files for 11 inspectors contracted with before January 1, 1999,
did not contain evidence that they had been certified in the one- and two-family dwelling
electrical category as required. (Depending on their contract dates, inspectors have different
deadlines for achieving certification.)         Twenty-seven files also indicated potential
noncompliance with regard to certification—these inspectors were required to achieve
certification in the general electrical category by January 1, 2002, and had not achieved that
certification as of mid-July 2001, when the file review was conducted. Because Deputy
Electrical Inspectors are not state employees, they do not fall under Department of Personnel
rules requiring annual evaluations. However, section management indicated that field
supervisors annually evaluate the inspectors. Three of 68 files (4%) did not have a fiscal year
1999 evaluation and 35 of 74 (47%) lacked a fiscal year 2000 evaluation.


                                       Recommendation

       Division of Fire Prevention management should verify that all staff (state staff and
contract staff) comply with minimum job requirements, including required certifications, and
document that compliance in their personnel files. Management should also ensure that all state
employees have a state application on file and that both state and contract employees are
evaluated annually.




                                               63
                                   Management’s Comment

        We concur in part with this finding. The Electrical Inspections Section and Codes
Enforcement Section will audit all personnel files to ensure that state applications are present.
Applications will be obtained from the Deputy Electrical Inspectors or Department of Personnel
for all missing this information. The Electrical Inspections Section has implemented a plan,
where the supervisor rides with each inspector, at least one time annually, thereby establishing a
basis to provide an annual evaluation of the inspector’s performance. By June 30, 2003, all
Deputy Electrical Inspectors will be certified in 1 & 2 Family Dwelling and Electrical General as
required, with the proper documentation in each personnel file.

        We must point out however, that all positions in the Codes Enforcement Section are civil
service positions, and require the processing of a register prior to hiring an employee. Each
employee has either submitted an application to the Department of Personnel for scoring, based
on education and prior experience, or passed a civil service examination to qualify for these
registers, thereby ensuring that minimum job requirements are met for all employees. Codes
Enforcement is currently working on updating all job performance plans and ensuring that all
employees are evaluated annually.




15.   The majority of manufactured houses are being set up without the required anchoring
      permits and inspections

                                             Finding

         Manufactured homes that have not been properly anchored may pose a threat to the
homes’ occupants and/or persons living nearby. In 1976, the General Assembly passed
legislation requiring that manufactured homes be anchored by an installer approved by the State
Fire Marshal (i.e., the Commissioner of the Department of Commerce and Insurance) and be
inspected for compliance with standards set by the department. Legislation passed in 1981
added a requirement that the installer apply for a permit prior to installing a stabilizing system.
Despite these requirements, which have been in place for 20 or more years, our review indicated
that few installation permits are being issued and few inspections are being conducted. As a
result, the department has no assurance that manufactured houses have been installed properly,
by licensed individuals, and in compliance with standards.

        In order to determine whether anchoring permits were being issued and inspections being
conducted as required, we obtained and analyzed department data on newly installed
manufactured housing inspections and permits for the period July 16, 2001, to May 29, 2002. To
estimate how many anchoring permits should have been issued (and inspections conducted), we
also obtained data on electrical permits and inspections for newly installed manufactured
housing, and then compared the two sets of data. (The department’s Electrical Permitting
System does not currently provide a way to relate electrical permits and inspections to anchoring
permits and inspections. To make our comparison, we examined the name and address for each
electrical inspection on a new manufactured house installation and made a manual comparison to


                                                64
the name and address for each anchoring inspection.) Statewide, only 13 percent (2,015 of
16,021) of the new manufactured housing installations that had electrical inspections also had
anchoring inspections performed. We also looked in detail at data for five counties (Anderson,
Bedford, Bledsoe, Hardin, and Hawkins) spread across the state. For these five counties, the
percent of newly installed manufactured houses that obtained the anchoring permits and
inspections in addition to electrical permits and inspections ranged from zero to 9 percent, with a
five-county total of 31 anchoring inspections compared to 1,057 electrical inspections.

        Department staff confirmed that the anchoring permit and inspection program has not
worked well. Staff also expressed concerns that the public was unaware of the need for
anchoring permits and inspections. However, the department does not appear to have taken
action to track compliance with statutory requirements or to improve public awareness of the
need for manufactured homes to be properly anchored by licensed individuals. The department’s
current focus is on inspecting manufactured homes at the factory and on dealer lots and
investigating related complaints. Electrical inspectors on contract with the department are
responsible for inspecting the anchoring of manufactured housing, once a permit has been
applied for and an inspection requested.

       Legislation passed in May 2002 significantly amended and strengthened Title 68, Chapter
126, Tennessee Code Annotated, in several ways, including (1) requiring that an installation
permit be obtained before electricity can be turned on in a manufactured home; (2) requiring the
department to ensure that at least 5 percent of manufactured homes installed each year are
inspected; and (3) strengthening training requirements for retailers. County clerks will be
responsible for selling the installation permit decals and will be required to report monthly to the
department . . . “the license numbers of installers and retailers who purchase installation permits
and the corresponding permit numbers sold.” These provisions go into effect January 1, 2004.
However, unless this new legislation is enforced—unlike the earlier statutes—the department
will continue to have little assurance that manufactured housing in the state has been
appropriately installed/anchored.


                                        Recommendation

        The department should work with manufactured homes builders and retailers to ensure
that manufactured homes buyers understand the statutory requirements regarding anchoring
permits and inspections, as well as the reasons why correct installation is so important. The
department should also work with county clerks, as well as state and local electrical inspectors,
to ensure compliance with new legislative requirements. To effectively monitor inspections, the
department should make changes to its Electrical Permitting System so that information on
electrical and anchoring inspections can be more easily compared.


                                    Management’s Comment

      We concur with this finding. This has been corrected by a legislative amendment to
Tennessee Code Annotated, Title 68, Chapter 126, Parts 2 and 4. This will also create a new



                                                65
section in the Codes Enforcement Section to enforce the requirement of anchoring stabilization
systems and inspections of manufactured homes. This amendment will take effect on January 1,
2004.




TennCare Oversight Division


16. The Division of TennCare Oversight needs to establish formal policies for conducting
    operations

                                            Finding

        Policies governing the operations of the TennCare Oversight Division lack formality.
The division’s policy manual, which includes guidance for performing general office duties (e.g.,
locating documents) as well as for addressing technical matters (e.g., taking complaints from
providers or corresponding with MCOs), is a compilation of memos and e-mails issued by
division management. These memos and e-mails often refer to staff members by name (instead
of job title) and are casual in tone. While the policies address situations as they arise, it is
difficult to determine if a policy rescinds or updates a previous policy. Furthermore, most of the
memos and e-mails do not include the date on which the policy goes into effect.

       Policies serve as valuable references on numerous matters and assist in the consistent
treatment of issues by management and staff. They are definite courses or methods of action
which guide present and future decisions. Because the division relies on its policies to perform
daily operations and to address statutory responsibilities, the policies should be clear, concise,
and consistent.


                                       Recommendation

        Division of TennCare Oversight management needs to establish formal, consistent
policies that include reference to job level/type rather than staff members’ names; clarify
whether the policy is new or updates or rescinds a previous policy; and include the date on which
the policy goes into effect. When a policy is updated, management should provide staff with the
revised version of the entire policy, not just the changes.


                                   Management’s Comment

       We concur with the recommendation. The division has formalized its policies to include
references to job level/type rather than staff members’ names; to set out whether a policy is new
or an update or rescission; and to include the date the policy goes into effect. The TennCare
Division anticipates that the revised policies will be finalized on or before March 1, 2003.



                                               66
       RESULTS OF ADDITIONAL AUDIT WORK PERFORMED



DIVISION OF CONSUMER AFFAIRS

        The Division of Consumer Affairs is charged with protecting the public from deceptive
business practices as defined in Section 47-18-102, Tennessee Code Annotated. Among the
division’s responsibilities is the maintenance of a consumer “hotline” designed to answer
questions about consumer protection laws, refer persons with inquiries regarding other parts of
state government to the appropriate department or agency, and assist Tennessee residents with
complaints against companies doing business within the state. The Consumer Affairs Division
attempts to mediate written consumer complaints through direct correspondence with the
businesses in question. If warranted, cases may be referred to the Attorney General’s Office for
further action. The division also prepares a weekly media column, a quarterly newsletter, the
Buyer Beware List, and consumer tip sheets.

         According to management, the Division of Consumer Affairs, which has 12 staff
positions, may receive as many as 70,000 calls each year. However, because of the volume of
calls, the division does not keep a record of every call it receives. Complainants who call the
hotline are referred to a division consumer specialist or to the appropriate department/agency, if
applicable. Callers are encouraged to work out the problem on their own but are told to submit a
written complaint (by mail or e-mail) if they are unable to resolve the problem. The division
receives an estimated 5,000 to 6,000 written complaints each year.

        According to staff of the Consumer Advocate and Protection Division of the Attorney
General’s Office, most of the state’s consumer cases originate with complaints and/or
information initially received from, and then referred by, the Division of Consumer Affairs. The
director of Consumer Affairs speaks weekly with staff of the Deputy Attorney General. For
cases that have reached the trial level, Consumer Affairs staff assisted in gathering information
and have served as witnesses. They have also aided in undercover investigations that have
subsequently led to enforcement actions.

        Staff of the Attorney General’s Office stated that the decision on whether to accept a
referral from the Division of Consumer Affairs is based on a number of factors:

       •   whether any specific statutes have been violated,
       •   the number of consumer victims,
       •   the possibility of gaining some sort of monetary restitution,
       •   whether the conduct warrants state action to stop the practice, and
       •   whether some action by the Attorney General’s Office is the most efficient manner of
           handling the situation.



                                                67
In most cases, the Director of Consumer Affairs and an attorney in the Attorney General’s Office
confer before an actual referral is made so that the issues listed above are addressed before the
matter is referred. According to Attorney General’s Office staff, most cases referred from the
Division of Consumer Affairs do not result in litigation. The Tennessee Consumer Protection
Act provides for a specialized settlement form called an Assurance of Voluntary Compliance.
Most of the Attorney General’s consumer protection cases are resolved through this mechanism.
The remaining cases are resolved through some other type of settlement.

         Our review of 20 Consumer Affairs complaint files indicated that, in general, the files
were well organized and contained adequate documentation relating to the two parties involved
in the dispute. All of the files reviewed were opened and closed in calendar year 2000. There
were seven files (35%) in which the investigator failed to notify the respondent within the three-
week window identified as a goal by the division director. (In four of the seven cases,
respondents were notified within about a month; the other three files either had no record of the
notification date or notification was not sent.) In all, 13 of the 20 cases (65%) were settled. In
three cases (15%), the consumer specialist was unable to find the respondent, and nothing further
was done to address the complainant’s problems. In one case, no action was taken and there was
little in the file to indicate what became of the matter. In another case, the division declined to
pursue the complaint because of staff’s doubts regarding the consumer’s honesty. In a third
instance, the division recommended that the consumer pursue the insurance company directly
because, according to the consumer specialist, the division was powerless to do anything. And
finally, the specialist advised another consumer to hire an attorney after mediation was
unsuccessful. None of the cases reviewed were referred to the Attorney General’s Office, nor
was there any evidence of fines levied against offending parties.


CONSUMER INSURANCE SERVICES

        The Consumer Insurance Services section of the Division of Insurance handles
complaints against insurance agents and companies. When charges are substantiated, the cases
are referred to the department’s Office of General Counsel. Actions taken against agents or
companies may include a warning letter, suspension of license, or ultimately an administrative
hearing with the possibility of monetary penalties. Once the investigation is complete, a report is
issued. The Director of Fraud and Special Investigations and the Director of Consumer
Insurance Services must agree with the findings in the report. Once the directors have agreed on
the substance and merit of the investigation, it is forwarded to the Office of General Counsel.
Usually, the investigator preparing the report makes a recommendation as to any actions that will
be pursued. A consent order is prepared and presented to the subject of the investigation.
Administrative hearings are held when the subject of the investigation chooses not to sign the
consent order.

       The section recorded 3,801 consumer complaints during the year ended June 30, 2002.
(In addition, staff handles an estimated 38,000 consumer inquiries each year.) The division
attempts to mediate a solution between the two parties. The response from the insurance
company/agent is reviewed for consistency with the provisions of the contract and for its
applicability under the insurance laws and regulations of Tennessee. In some instances, the



                                                68
investigator has to state that the complaint is without merit or cannot be resolved, but in such
instances, other options or remedies may be suggested to the complainant.

        Our review of 39 Consumer Insurance Services files closed during fiscal year 2001 found
evidence that each case had been thoroughly investigated. In all cases, the complaint
investigators responded to the complaint by contacting the offending agent/agency. With two
exceptions, all cases were resolved in three weeks or less. All files reviewed listed a specific
resolution, ranging from “lack of jurisdiction” or “company/agent position upheld” to specific
actions taken against the company/agent. In one case, an agent’s license was revoked; in two
other cases, the agent was “warned” or verbally reprimanded. Five of the files detailed the dollar
amount recovered through the complaint process; several others noted that a refund had been
paid to the complainant (two files) or that the claim had been settled (six files).




                                               69
                                   RECOMMENDATIONS



LEGISLATIVE

      This performance audit identified the following areas in which the General Assembly
may wish to consider statutory changes to improve the efficiency and effectiveness of the
Department of Commerce and Insurance’s operations.

1. The General Assembly may wish to consider a formal definition of “fire department,” which
   would include training and background screening requirements for firefighters and would
   delineate between full-time and volunteer fire departments. The General Assembly may also
   wish to consider giving the Department of Commerce and Insurance authority to intervene
   when problems arise that threaten fire service in a particular locality.

2. The General Assembly may wish to clarify language in Section 68-102-111, Tennessee Code
   Annotated, to require fire departments to report fire incident data to TFIRS at least annually.


ADMINISTRATIVE

       The following areas should be addressed to improve the efficiency and effectiveness of
the Department of Commerce and Insurance’s operations.

1. The Division of Insurance should take action to ensure that all financial analysts and
   supervisors are aware of all policies and procedures (both formal and informal) related to the
   financial analysis process and hold staff accountable for applying those policies and
   procedures on a uniform and consistent basis.

2. Division of Insurance management should implement a process that includes on-site follow-
   up of serious deficiencies to ensure that those deficiencies have been corrected by the
   insurance companies. Division staff and department legal staff should coordinate to ensure
   that sanctions are issued against companies that fail to correct serious deficiencies.

3. Division of Insurance management should develop a formal process to ensure that all
   securities maintained for statutory deposit meet all state and departmental requirements, as
   well as any specific requirements in companies’ individual depository agreements.

4. Management of the Examination Section of the Division of Insurance should ensure that
   examiners uniformly and consistently apply the policies and procedures set forth by the
   Financial Conditions Examiners Handbook and that examiners document their reasons for
   not following the handbook in specific instances.




                                               70
5. Division of Insurance management should ensure that, before companies are admitted to do
   business in Tennessee, staff obtain and review all information required by the Uniform
   Certificate of Authority Application, as well as other information deemed pertinent by
   management. Staff should document reasons for exceptions to the normal process. In
   addition, management should review the process for documenting admissions decisions and
   develop a formal procedure to ensure that such decisions are adequately documented for all
   companies.

6. The department should ensure that all Bomb and Arson special agents get 40 hours of POST-
   related training every year. To enhance leadership skills, the department should make
   available and require supervisory training for all levels of special agents. The department
   should cooperate with the Department of Personnel in the development and implementation
   of such training.

7. The department should update Bomb and Arson Section policies and procedures so that
   special agents are properly guided in their investigations and can adequately resolve
   jurisdictional disputes among local investigative agencies.

8. The department should determine the need and demand for particular types of bomb and
   arson training for local fire and police department personnel by surveying such personnel and
   by inquiring how other states are meeting similar training needs. The department should then
   take steps to provide this training.

9. Department management should assess the level of access to the Bomb and Arson Section’s
   office space and case information, and take action (e.g., providing adequately enclosed
   facilities) to ensure restricted access to both sensitive documents and case-related
   conversations. Staff should be careful when discussing investigations and take precautions to
   help ensure that unauthorized individuals do not overhear case-related conversations. The
   department should transfer all valuable investigative information in paper case files to AIMS
   2000.

10. The department should take steps to increase TFIRS participation by fire departments,
    including educating them on the usefulness of fire incident data in fire prevention, and
    providing technical assistance (e.g., regarding software compatible with TFIRS).

11. The department should develop and implement a formal, comprehensive fire-prevention
    education program. Information from TFIRS on the causes of fire deaths in specific
    locations should be used to target educational efforts.

12. The department should develop rules and regulations to institute regular periodic
    verifications of exempt entities to ensure that such entities have the manpower and technical
    knowledge to enforce state-required electrical codes. Department management should also
    review current statutory language and, if necessary, prepare proposed legislation for
    consideration by the General Assembly, to clarify what local governments must do to justify
    exemptions. In developing rules and regulations and/or preparing proposed statutory




                                               71
   language, the department may wish to adopt language similar to that in existing statutes,
   rules, and regulations concerning building construction safety standards.

13. The department should develop procedures for effectively auditing entities exempted from
    state building and fire code inspections at least every three years as required by statute, to
    ensure that such entities are performing their enforcement functions appropriately.

14. Division of Fire Prevention management should verify that all staff (state staff and contract
    staff) comply with minimum job requirements, including required certifications, and
    document that compliance in their personnel files. Management should also ensure that all
    state employees have a state application on file and that both state and contract employees
    are evaluated annually.

15. The department should work with manufactured home builders and retailers to ensure that
    manufactured home buyers understand the statutory requirements regarding anchoring
    permits and inspections, as well as the reasons why correct installation is so important. The
    department should also work with county clerks, as well as state and local electrical
    inspectors, to ensure compliance with new legislative requirements. To effectively monitor
    inspections, the department should make changes to its Electrical Permitting System so that
    information on electrical and anchoring inspections can be more easily compared.

16. Division of TennCare Oversight management needs to establish formal, consistent policies
    that include reference to job level/type rather than staff members’ names; clarify whether the
    policy is new or updates or rescinds a previous policy; and include the date on which the
    policy goes into effect. When a policy is updated, management should provide staff with the
    revised version of the entire policy, not just the changes.


FUTURE CONSIDERATION

1. The state should evaluate the costs and benefits of developing and implementing statewide
   building standards for one- and two-family dwellings—weighing the cost of additional
   regulation and inspection against the potential decrease in structural damage, injury, and loss
   of life that could result from strengthening standards for residential housing throughout the
   state.




                                               72
                                       APPENDIX 1
                                  TITLE VI INFORMATION

        All programs or activities receiving federal financial assistance are prohibited by Title VI
of the Civil Rights Act of 1964 from discriminating against participants or clients on the basis of
race, color, or national origin. In response to a request from members of the Government
Operations Committees, we compiled information concerning federal financial assistance
received by the Department of Commerce and Insurance, and the department’s efforts to comply
with Title VI requirements. The results of the information gathered are summarized below.

       The Department of Commerce and Insurance currently receives federal funds for two
types of activities. First, the department receives funds through the U.S. Department of Justice’s
Edward Byrne Memorial Grant for its “Project Burn Out” program. For fiscal year 2002, the
department received $32,181, which was passed through the Department of Finance and
Administration’s Office of Criminal Justice Programs. The department used the funds for crime
scene supplies and apparel, weapons, and lease payments on the following: a vehicle equipped to
respond to bombing and arson incidents, space on a computer server, and point-to-point protocol
accounts to enable field agents to access the state’s bomb and arson database from a crime scene.
According to the fiscal director, the department reports the total amount spent to the Department
of Finance and Administration and records individual expenditures in the State of Tennessee
Accounting and Reporting System (STARS).

        The department also receives funds from the U.S. Department of Housing and Urban
Development (HUD) as part of a cooperative agreement under which Commerce and Insurance
staff perform monitoring reviews at factories producing manufactured housing, investigate
consumer complaints, and take enforcement actions as needed. For fiscal year 2002, the
department received approximately $204,320 (the department receives a set fee for each
manufactured home section shipped into the state and for each section produced in the state).
The department submits to HUD a state plan, which details Tennessee’s provisions for enforcing
federal manufactured home construction and safety standards.

         The department has a Title VI Coordinator whose duties include updating and preparing
the Title VI Implementation plan, accepting Title VI complaints, investigating and resolving any
such complaints along with the department’s legal counsel, and tracking Title VI legislation.
The department submitted its annual Title VI compliance report and implementation plan update
to the Office of the Comptroller of the Treasury on June 21, 2002, as required by statute. The
letter submitted by the department stated that the Title VI policies, procedures, complaint
procedures, terminology, and monitoring methodology are contained in the department’s Title VI
compliance plan filed with Comptroller’s Office on June 25, 1998. According to the letter, there
have been no changes to the plan since that time. The plan (which we reviewed) describes the
department’s Title VI policy, the responsibilities of the various levels of government, the
department’s proposed Title VI activities related to public notification of eligible participants,
data collection and reporting of participation data, complaint handling, and compliance reviews.
Currently, however, many of the Title VI-related activities outlined in the plan are not applicable
to the department’s federally funded activities (see above) because of the nature of those
activities (i.e., bomb and arson investigations and manufactured housing inspections).



                                                73
       According to the Title VI Coordinator and the fiscal director, the department has received
no Title VI complaints in the last three years and has performed no compliance reviews. The
TennCare Oversight Division of the department does have steps to review the managed care
organizations’ (MCOs’) compliance with Title VI as part of its financial and contract
examinations of those MCOs. Based on our review, however, it does not appear that all
examinations include this review. For example, only four of the plans (OmniCare, Preferred
Health Partnership, Vanderbilt, and Volunteer State Health Plan) listed in Table 3 on page 19
were examined for Title VI compliance.


   Staff of the Department of Commerce and Insurance by Title, Gender, and Ethnicity
                                 As of April 30, 2002
                                                Gender                    Ethnicity
                   Title                      Male Female          White Black Asian Other
Account clerk                                   2       1            3      0      0   0
Accountancy board investigator                  0       1            1      0      0   0
Accounting manager                              1       0            1      0      0   0
Accounting technician                           1      11           10      2      0   0
Accountant                                      1       0            1      0      0   0
Assistant commissioner                          2       3            4      1      0   0
Actuarial officer                               2       0            2      0      0   0
Actuary                                         4       4            8      0      0   0
Administrative director regulatory boards       1       6            6      1      0   0
Administrative manager regulatory boards        1       4            5      0      0   0
Administrative assistant regulatory boards      5      39           35      9      0   0
Administrative assistant                        1       4            3      2      0   0
Administrative services assistant               4      26           27      3      0   0
Administrative services manager                 0       1            1      0      0   0
Administrative secretary                        1      20           19      2      0   0
Attorney                                        7       6           11      1      1   0
Audit director                                  1       0            1      0      0   0
Auditor                                         7       1            6      2      0   0
Bomb and arson assistant director               1       0            1      0      0   0
Bomb and arson director                         1       0            1      0      0   0
Bomb and arson special agent                   19       1           20      0      0   0
Bomb and arson special agent in-charge          1       1            2      0      0   0
Building maintenance worker                     1       0            1      0      0   0
Board member                                   71      17           79      8      1   0
Burial services specialist                      2       0            2      0      0   0
Codes enforcement program director              1       0            1      0      0   0
Clerk                                           6      12           13      5      0   0



                                               74
              Staff of the Department by Title, Gender, and Ethnicity (Cont.)
                                               Gender                  Ethnicity
                     Title                   Male Female        White Black Asian Other
Computer operations manager                    0       1          1      0      0   0
Commissioner                                   0       1          1      0      0   0
Commission member                             30      10         32      7      0   1
Consumer insurance investigator               11       2         11      2      0   0
Consumer insurance services manager            3       0          2      1      0   0
Consumer protection assistant director         1       0          1      0      0   0
Consumer protection director                   1       0          1      0      0   0
Consumer protection specialist                 4       2          6      0      0   0
Contractor inspector                           9       0          9      0      0   0
Data entry operator                            0       1          1      0      0   0
Deputy commissioner                            2       0          2      0      0   0
Director – agent licensing/continuing          0       1          1      0      0   0
 education
Director – workmen’s compensation/             1        0          1      0     0   0
 surplus lines
Distributed computer operator                  1        2          1      2     0   0
Electrical inspector supervisor                3        0          3      0     0   0
Electrical inspection director                 1        0          0      1     0   0
Executive director – emergency                 1        1          2      0     0   0
 communication board
Executive administrative assistant             0        2          2      0     0   0
Executive secretary                            0        4          4      0     0   0
Facilities administrator                       1        0          1      0     0   0
Facilities construction assistant director     1        0          1      0     0   0
Facilities construction director               1        0          1      0     0   0
Facilities construction specialist             9        1          8      1     0   1
Facility supervisor                            1        0          1      0     0   0
Food services manager                          0        1          1      0     0   0
Fire service instructor                        2        0          2      0     0   0
Fire safety manager                            1        0          1      0     0   0
Fire safety specialist 1                      24        2         24      1     1   0
Fire safety supervisor                         3        0          3      0     0   0
Fiscal director                                0        1          0      0     0   1
Fire service program director                  1        0          1      0     0   0
General counsel                                1        0          1      0     0   0
Information resource support specialist        3        0          3      0     0   0
Information officer                            0        1          0      0     0   1
Information systems analyst                    3        2          3      2     0   0



                                             75
            Staff of the Department by Title, Gender, and Ethnicity (Cont.)
                                              Gender                 Ethnicity
                    Title                   Male Female       White Black Asian Other
Information systems consultant                0       1         1      0      0   0
Information systems director                  1       0         1      0      0   0
Information systems manager                   1       0         1      0      0   0
Insurance analysis director                   1       0         1      0      0   0
Insurance examiner in-charge – CFE            5       3         7      1      0   0
Insurance examiner                            6       4         7      3      0   0
Insurance examination assistant director      1       0         1      0      0   0
Insurance examiner – AFE                      6       2         7      1      0   0
Insurance examiner – CFE                      1       1         1      1      0   0
Insurance examiner director                   1       0         1      0      0   0
Insurance investigation director              1       0         1      0      0   0
Legal services director                       0       1         1      0      0   0
Licensing technician                          5      40        36      9      0   0
Mail clerk                                    1       0         0      1      0   0
Mail technician                               1       0         0      1      0   0
Manufactured homes inspector                 14       1        15      0      0   0
Manufactured homes inspection manager         1       0         1      0      0   0
Manufactured homes inspection supervisor      2       0         2      0      0   0
Motor vehicle commission field investigator   8       5        13      0      0   0
Office supervisor                             0       2         2      0      0   0
Personnel analyst                             0       1         1      0      0   0
Personnel director                            0       1         1      0      0   0
Personnel manager                             0       1         1      0      0   0
Personnel technician                          0       2         1      1      0   0
Pharmacy board director                       1       0         1      0      0   0
Pharmacist                                    5       0         5      0      0   0
Procurement officer                           1       0         1      0      0   0
Regulatory board executive director           4       3         7      0      0   0
Regulatory board field representative         5       7        11      1      0   0
Regulatory boards investigation assistant     1       0         1      0      0   0
 director
Regulatory boards investigation director      1       0          1      0     0   0
Regulatory board investigator                10       1         10      1     0   0
Regulatory board investigator supervisor      1       0          1      0     0   0
Secretary                                     1      24         18      6     0   1
Securities examiner                           8       2          7      3     0   0
Securities examiner supervisor                2       1          2      1     0   0
Statistical analyst                           1       1          2      0     0   0


                                           76
            Staff of the Department by Title, Gender, and Ethnicity (Cont.)
                                            Gender                   Ethnicity
                 Title                    Male Female         White Black Asian Other
Statistical clerk                           1      0            0      1      0   0
Statistician                                1      1            2      0      0   0
TennCare examiner                           3      5            6      2      0   0
TennCare examination director               0      1            1      0      0   0
TennCare examination manager                2      0            2      0      0   0
                                          367    304          577    86       3   5




                                           77
                                       Appendix 2
      Fire Department Participation in the Tennessee Fire Incident Reporting System
                                As of September 30, 2001

            Anderson County                                    Blount County

Reporting             Not Reporting              Reporting             Not Reporting
Marlow                Andersonville               Blount County        Alcoa
Norris                Briceville                  Maryville            Friendsville
Oak Ridge             Claxton                                          Townsend Area
                      Clinton
                      Lake City
                      Medford

             Bedford County                                   Bradley County

Reporting             Not Reporting               Reporting            Not Reporting
Bell Buckle           Wartrace                    Bradley County       Charleston
Shelbyville                                       Cleveland
Volunteer Fire
 Service

             Benton County                                Campbell County

Reporting             Not Reporting               Reporting            Not Reporting
Big Sandy             Camden                      Caryville            Campbell County
South 40              Chalk Level                 Jacksboro            Lafollette
                      Eva                         Jellico              Pinecrest
                      Holladay-McIllwain                               Ridgewood
                      Morris Chapel                                    White Oak
                      Sandy River

            Bledsoe County                                    Cannon County

Reporting             Not Reporting               Reporting            Not Reporting
Brayton               Brockdale                   Auburntown           None
Pikeville             Griffith                    Cannon County
                      Hendon                      Woodbury
                      Luminary District 7
                      Lusk
                      Mt. Crest
                      Nine Mile
                      Rigsby




                                            78
                    Fire Department Participation in the TFIRS (Cont.)

         Carroll County                                         Claiborne County

Reporting            Not Reporting                 Reporting                Not Reporting
Huntingdon           Atwood                        Clear Fork               Springdale
McKenzie             Bruceton                      Cumberland Gap
                     Carroll County                N. Claiborne County
                     Hollow Rock                   North Tazewell
                     McLemoresville                South Claiborne
                     Trezevant                     Speedwell
                                                   Tazewell/New
                                                    Tazewell

             Carter County                                        Clay County

Reporting            Not Reporting                 Reporting                Not Reporting
Elizabethton         Central                       None                     Celina
Elk Mills Poga       Hampton Valley Forge                                   East Clay County
Watauga              Roan Mountain                                          Moss
                     Stoney Creek                                           Mt. Vernon
                     West Carter County                                     Pea Ridge
                                                                            West End

        Cheatham County                                         Cocke County

Reporting            Not Reporting                 Reporting                Not Reporting
Kingston Springs     Ashland City                  Cocke County             Centerview
                     Henrietta                     Cosby                    Del Rio
                     Mid-Cheatham County           Newport                  Grassy Fork
                     Pegram                                                 Long Creek
                     Pleasant View                                          Parrottsville
                     Two Rivers

         Chester County                                         Coffee County

Reporting            Not Reporting                 Reporting                Not Reporting
Henderson            Chester County                Manchester               AEDC
                     Enville                                                Hickerson Station
                                                                            Hillsboro
                                                                            New Union
                                                                            North Coffee County
                                                                            Summitville
                                                                            Tullahoma




                                            79
                   Fire Department Participation in the TFIRS (Cont.)

         Crockett County                                       DeKalb County

Reporting          Not Reporting                  Reporting                Not Reporting
None               Alamo                          DeKalb County            Alexandria
                   Bells                                                   Smithville
                   Friendship
                   Maury City

        Cumberland County                                      Dickson County

Reporting          Not Reporting                  Reporting                Not Reporting
Crossville         Cumberland County              Vanleer                  Burns
Fairfield Glade                                                            Charlotte
                                                                           City of Dickson
                                                                           Claylick
                                                                           Cumberland Furnace
                                                                           Dickson County
                                                                            Rescue Squad
                                                                           Harpeth Ridge
                                                                           Tennessee City
                                                                           White Bluff

         Davidson County                                        Dyer County

Reporting          Not Reporting                  Reporting                Not Reporting
Goodlettsville     Metro Nashville                Dyersburg                Dyer County
                                                                           Newbern
                                                                           Trimble

          Decatur County                                       Fayette County

Reporting          Not Reporting                  Reporting                Not Reporting
Bath Springs       Decatur County                 Gallaway                 Braden
                   Decaturville                   Moscow                   District 15
                   Jeanette                       Oakland                  LaGrange
                   Parsons                        Somerville               Macon
                   Woodlawn Shores                                         North Fayette County
                                                                           Northeast Fayette
                                                                            County
                                                                           Piperton
                                                                           Rossville
                                                                           West Fayette County
                                                                           Williston




                                           80
                      Fire Department Participation in the TFIRS (Cont.)

          Fentress County                                          Grainger County

Reporting                   Not Reporting             Reporting                  Not Reporting
None                        Fentress County           None                       Bean Station
                                                                                 Blaine
                                                                                 Rutledge
                                                                                 Thorn Hill
                                                                                 Washburn

             Franklin County                                           Greene County

Reporting                   Not Reporting             Reporting                  Not Reporting
Cowan                       Alto Oak Grove            Caney Branch               Camp Creek
Crow Creek Valley           Belvidere                 Greeneville                Cedar Creek
Decherd                     Broadview                 Ore Bank                   DeBusk
Fourth District             Capitol Hill              St. James                  McDonald
Keith Springs               Estill Springs            Sunnyside                  Midway
Lexie Crossroads            Huntland                  Town of Mosheim            Mosheim
N. Franklin Co.             Sewanee                   United                     Newmansville
Winchester                                                                       South Greene
                                                                                 Tusculum

          Gibson County                                           Grundy County

Reporting               Not Reporting                 Reporting                  Not Reporting
Bradford                    Gibson                    Gruetli-Laager             Altamont
Dyer                        Gibson County             Pelham Valley              Beersheba Springs
Milan                       Humboldt                                             Coalmont
Rutherford                  Medina                                               Monteagle Fire and
                            Milan Army                                            Rescue
                             Ammunition Plant                                    Palmer
                            Trenton                                              Southeast Grundy Co.
                            Yorkville                                             Rescue
                                                                                 Tracy City
                                                                                 White City

             Giles County                                         Hamblen County

Reporting                   Not Reporting             Reporting                  Not Reporting
Elkton                      Ardmore                   Morristown                 E. Hamblen Co.
Pulaski                     Giles Co. Fire and        N. Hamblen Co.             S. Hamblen Co.
                            Rescue                    W. Hamblen Co.
                            Minor Hill




                                                 81
                    Fire Department Participation in the TFIRS (Cont.)

        Hamilton County                                            Hawkins County

Reporting             Not Reporting                Reporting               Not Reporting
Dallas Bay            Chattanooga                  Church Hill             Bulls Gap
Signal Mountain       East Ridge                   Mt. Carmel              Carters Valley
                      Flat Top                                             Clinch Valley
                      Highway 58                                           Goshen Valley
                      Lookout Mountain                                     Holston Army
                      Mowbray                                               Ammunition Plant
                      Red Bank                                             Lakeview
                      Sale Creek                                           Persia
                      Sequoyah                                             Rogersville
                      Soddy Daisy                                          Stanley Valley
                      Tri-Community                                        Striggersville
                      Waldens Ridge                                        Surgoinsville

            Hancock County                                   Haywood County

Reporting             Not Reporting                Reporting               Not Reporting
None                  Blackwater Vardy             Haywood County          Eurekaton Hillville
                      Camps                                                Stanton
                      Panther Creek                                        Woodland-Union
                      Snake Hollow
                      Sneedville
                      Treadway

       Hardeman County                                     Henderson County

Reporting             Not Reporting                Reporting               Not Reporting
Bolivar               Grand Junction               Henderson Co.           None
Middleton             Grand Valley                 Lexington
Toone                 Hickory Valley               Scotts Hill
                      Hornsby
                      New Castle
                      Saulsbury
                      Silerton District
                      Whiteville

            Hardin County                                        Henry County

Reporting             Not Reporting                Reporting               Not Reporting
None                  Hardin County                Henry                   Cottage Grove
                      Savannah                     Paris                   Mansfield
                                                   Paris Landing           Oakland
                                                                           Puryear
                                                                           Springville




                                            82
                   Fire Department Participation in the TFIRS (Cont.)

          Hickman County                                       Jefferson County

Reporting           Not Reporting                   Reporting            Not Reporting
None                Bon Aqua                        Dandridge            Kansas Talbott
                    Centerville                     Jefferson City       Lakeway Central
                    Hickman Co. Rescue Squad        New Market           White Pine
                    Pinewood

            Houston County                                     Johnson County

Reporting           Not Reporting                   Reporting            Not Reporting
Erin                Tennessee Ridge                 First District       Butler
                                                    Mountain City        Doe Valley
                                                    Second District      Dry Run
                                                    Shady Valley         Neva
                                                                         Trade

       Humphreys County                                         Knox County

Reporting           Not Reporting                   Reporting            Not Reporting
Waverly             Bold Springs/                   Karns                Heiskell
                     Poplar Grove                                        Knoxville
                    Humphreys County                                     Rural Metro
                    McEwen
                    New Johnsonville

          Jackson County                                        Lake County

Reporting           Not Reporting                   Reporting            Not Reporting
None                Dodson Branch                   None                 Ridgely
                    Fairview                                             Tiptonville
                    Flynns Lick
                    Gainesboro City
                    Granville Cooperative
                    Jackson County Central
                    Jennings Creek
                    Nameless
                    South Side
                    West End




                                               83
                   Fire Department Participation in the TFIRS (Cont.)

         Lauderdale County                                      Loudon County

Reporting             Not Reporting                 Reporting               Not Reporting
Ripley                East Lauderdale Co.           Greenback               Lenoir City
                      Gates                         Loudon County           Loudon
                      Halls                         Philadelphia            Tellico Village
                      Henning
                      NW Lauderdale Co.
                      West Lauderdale Co.

           Lawrence County                                      Macon County

Reporting             Not Reporting                 Reporting              Not Reporting
Crossroads            Center Point                  Lafayette              Macon Co.
Ethridge              Gandy                         Red Boiling Springs     Rescue Squad
Henryville            Iron City
Loretto Fire and      Lawrence Co. Rescue
Rescue                Squad
New Prospect          Lawrenceburg
                      Leoma
                      SE Lawrence County
                      St. Joseph
                      Summertown
                      West End
                      West Point

            Lewis County                                      Madison County

Reporting             Not Reporting                 Reporting              Not Reporting
None                  Howenwald                     Jackson                Madison County
                      Lewis County

          Lincoln County                                      Marion County

Reporting             Not Reporting                 Reporting              Not Reporting
None                  Fayetteville                  Battle Creek           Foster Falls
                      Lincoln County                Crossroads             Haletown
                      Petersburg                    Jasper                 Kimball
                                                    Sequatchie             Mullins Cove
                                                    South Pittsburg        New Hope
                                                     Mountain              Orme
                                                    Whitwell               South Pittsburg
                                                                           Suck Creek
                                                                           Mountain
                                                                           Sweetens Cove
                                                                           West Valley
                                                                           Whitwell Mtn.
                                                                            Fire and Rescue




                                            84
                    Fire Department Participation in the TFIRS (Cont.)

          Marshall County                                   McNairy County

Reporting              Not Reporting                 Reporting             Not Reporting
Berlin                 Chapel Hill                   Bethel Springs        Adamsville
Cornersville           Lewisburg                     Finger                Eastview
Farmington/            Belfast                       McNairy County        Guys
Richcreek              Mooresville                   Ramer                 Michie
Five Points                                          Selmer                Milledgeville
                                                                           Stantonville

               Maury County                                        Meigs County

Reporting              Not Reporting                 Reporting             Not Reporting
Culleoka               Columbia                      Decatur               None
Mt. Pleasant           Maury County                  Meigs County
Theta                  Spring Hill

          McMinn County                                       Monroe County

Reporting             Not Reporting                  Reporting             Not Reporting
Englewood             Athens                         Madisonville          Ball Play
Etowah                Calhoun                        Sweetwater            Christenburg
                      Claxton Community                                    Citico
                      Etowah Rural                                         Coker Creek
                      McMinn County                                        Conasauga Valley
                      Niota                                                Hopewell
                                                                           Mt. Vernon
                                                                           North Monroe County
                                                                           Notchey Creek
                                                                           Rafter
                                                                           Tellico Plains
                                                                           Tri Community
                                                                           Turkey Creek
                                                                           Vonore

          Montgomery County                                       Overton County

Reporting             Not Reporting                  Reporting             Not Reporting
Montgomery Co.        Clarksville                    Livingston            Allons
                      Fort Campbell                                        Alpine
                                                                           Fairground
                                                                           Hardys Chapel
                                                                           Hilham
                                                                           Monroe
                                                                           Mountain Fire and
                                                                            Rescue
                                                                           Muddy Pond
                                                                           Rickman




                                             85
                    Fire Department Participation in the TFIRS (Cont.)

               Moore County                                        Perry County

Reporting             Not Reporting                  Reporting             Not Reporting
Lynchburg             Jack Daniels                   Cedar Creek           Flatwoods
                                                     Pineview              Linden
                                                     Pope                  Lobelville
                                                                           Perry County Rescue
                                                                            Squad

           Morgan County                                      Pickett County

Reporting             Not Reporting                  Reporting             Not Reporting
Wartburg              Burrville                      None                  Pickett County
                      Chestnut Ridge
                      Clear Fork
                      Coalfield
                      Deer Lodge
                      Joyner
                      Oakdale
                      Petros
                      Sunbright
                      Sunbright Area

             Obion County                                          Polk County

Reporting             Not Reporting                  Reporting             Not Reporting
Hornbeak              Kenton                         None                  Copperhill
Obion                 Obion County Rescue                                  East Polk County
South Fulton           Squad                                               West Polk County
Union City            Rives
                      Samburg-Reelfoot
                      Troy
                      Union City Rural

           Putnam County                                     Rutherford County

Reporting              Not Reporting                 Reporting             Not Reporting
Algood                 Baxter                        Murfreesboro          Almaville
Cookeville             Putnam                        Rutherford Co.        Christiana
Monterey                                             Salem-Blackman        Eagleville
                                                     Smyrna                Fosterville
                                                     Walter Hill           Kittrell
                                                                           Lascassas
                                                                           LaVergne
                                                                           Rockvale
                                                                           Southeast Rutherford




                                             86
                   Fire Department Participation in the TFIRS (Cont.)

              Rhea County                                        Scott County

Reporting             Not Reporting                 Reporting              Not Reporting
Dayton                None                          Oneida                 East 63
Graysville                                                                 Huntsville
Rhea County                                                                Mid County
Spring City                                                                Paint Rock
                                                                           Pine Hill
                                                                           Seventh District
                                                                           South Scott County
                                                                           Winfield

          Roane County                                       Sequatchie County

Reporting             Not Reporting                 Reporting              Not Reporting
Blair                 E. Roane County               Cagle Fredonia         Lone Oak
S. Roane County       Harriman                      Dunlap
                      Kingston                      Lewis Chapel
                      Midtown                       Southend
                      Oliver Springs
                      Rockwood
                      W. Roane County

        Robertson County                                        Sevier County

Reporting             Not Reporting                 Reporting              Not Reporting
Adams                 Cross Plains                  None                   Catons Chapel
Orlinda               Greenbrier                                           English Mountain
Robertson County      Ridgetop                                             Gatlinburg
Springfield           South Forks Services                                 Northview
White House                                                                Pigeon Forge
                                                                           Pittman Center
                                                                           Sevierville
                                                                           Seymour
                                                                           Walden Creek
                                                                           Wears Valley

          Shelby County                                         Sumner County

Reporting             Not Reporting                 Reporting              Not Reporting
Arlington             Collierville                  Gallatin               Millersville
Bartlett              Memphis                       Hendersonville         Mitchellville
Germantown                                          Westmoreland           Number One
Millington                                          White House            Portland
Shelby County                                                              Shackle Island
                                                                           Sumner County




                                             87
                     Fire Department Participation in the TFIRS (Cont.)

               Smith County                                        Tipton County

Reporting              Not Reporting                  Reporting             Not Reporting
Carthage               Forks River                    Brighton              Charleston
                       Gordonsville                   Covington             Garland
                       Rock City-Rome                 Covington Rural       Gilt Edge
                       Smith County                   Munford               Mason
                       South Carthage                 Quito
                                                      Three Star

             Stewart County                                    Trousdale County

Reporting              Not Reporting                  Reporting            Not Reporting
Dover                  Bumpus Mills                   Hartsville           None
Indian Mound           Leatherwood/
Stewart County          Brownfield
                       N. Stewart County

             Sullivan County                                       Unicoi County

Reporting              Not Reporting                  Reporting            Not Reporting
Avoca                  Area 421 Emergency             Erwin                Limestone Cove
Bluff City              Services                                           Southside
Bristol                Bloomingdale                                        Unicoi
Kingsport              East Sullivan County
                       Hickory Tree
                       Piney Flats
                       Sullivan County
                       Tri City Region Airport
                       Warriors Path
                       West Sullivan County

             Union County                                          Wayne County

Reporting              Not Reporting                  Reporting             Not Reporting
Luttrell               Maynardville                   Waynesboro City       Beech Creek
Sharps Chapel          Paulette                                             Clifton
                                                                            Collinwood
                                                                            Cypress Inn
                                                                            Highway 69
                                                                            Lutts
                                                                            Ovilla
                                                                            Southgate
                                                                            Topsy
                                                                            Wayne County




                                                 88
                   Fire Department Participation in the TFIRS (Cont.)

         Van Buren County                                          Weakley County

Reporting             Not Reporting                 Reporting                Not Reporting
Fall Creek Falls      Cedar Grove                   Gleason                  Dresden
Spencer                                             Greenfield               Sidonia
                                                    Latham/Dukedom           Weakley County
                                                    Martin                    Rescue Squad
                                                    Ore Springs-Como
                                                    Palmersville
                                                    Sharon

          Warren County                                           White County

Reporting             Not Reporting                 Reporting                Not Reporting
McMinnville           Campaign and                  Bon De Croft             Cassville
N. Warren County       Rock Island                  Doyle                    Central View
                      Centertown                    North End                Cherry Creek
                      Collins River                                          Eastland
                      Morrison                                               Hickory Valley
                      Viola Community                                        Mt. Gilead
                                                                             Sparta

        Washington County                                   Williamson County

Reporting             Not Reporting                 Reporting                Not Reporting
Embreeville           Fall Branch                   Nolensville              Arrington
Johnson City          Gray                                                   Brentwood
Jonesborough          Nolichuckey Valley                                     Fairview
Limestone             Sulphur Springs                                        College Grove
                                                                             Flat Creek/
                                                                             Bethesda
                                                                             Franklin
                                                                             Williamson Co.
                                                                              Rescue Squad

                                                              Wilson County

                                                    Reporting                Not Reporting
                                                    Lebanon                  Watertown
                                                    Wilson County




                                            89
                                            APPENDIX 3

                 Summary of Findings from Recent MCO/BHO Examinations
                                    as of July 31, 2002

John Deere Health Plan, Inc. (JDHP)
For the Period October 1, 1999 – December 31, 1999

1. JDHP did not process all claims selected for testing in accordance with the TennCare contract. Only
   44 of 50 claims in the sample were processed within 60 days. Furthermore, in April 2001, JDHP did
   not process all claims within 60 days of receipt. The TennCare contract requires an MCO to process
   100% of all claims within 60 days.
2. One of the 26 paid claims was not paid in accordance with the information on the payment system.
3. One claim was processed for a person who was not a JDHP enrollee.
4. JDHP did not apply the 180-day timely filing requirement to hospital claims.
5. The current pend report identified 12 claims that had been in JDHP’s possession for more than 60
   days.
6. The explanations of benefits (EOBs) provided to enrollees did not agree with the information
   recorded in the claims processing system for 4 of the 5 EOBs selected.
7. The written notice of the results of the claims adjudication given to providers did not agree with the
   information recorded in the claims processing system for 4 of the 5 EOBs selected for testing.
8. Six of the claims were not stamped with the date received.

        During the examination period, JDHP subcontracted with vendors for dental and vision services.
Because the subcontractors processed claims for their services, pharmacy, dental, and vision claims were
not included in JDHP’s pool of claims and were not tested for compliance.

Memphis Managed Care Corporation (MMCC) d/b/a TLC Family Care Health Plan
For the Period January 1, 1998 – March 31, 1999

1. MMCC did not process claims in the sample in accordance with Section 2-18. of the TennCare
   contract. Ten percent of clean claims in the sample were processed within 30 days, 14% of clean
   claims were processed within 40 days, and 34% of all claims in the sample were processed within 60
   days.
2. Three claims were paid with incorrect amounts because of non-system, manual errors.
3. Co-payment accumulation is not performed by the Diamond Claims System and, therefore, it could
   not be readily determined whether out-of-pocket payments were within maximum annual out-of-
   pocket liability limitations.
4. Peterson reviewed a sample of 50 claims and determined that 2 claims were inappropriately denied.
   (Commerce and Insurance retained Peterson Worldwide, LLC, a consulting group, to review
   MMCC’s financial operations and denied and pending claims.)
5. A current aged pending claims report as of April 29, 1999, indicated 49% of the aged pending claims
   were 61 days or older (per Peterson’s report).
6. EOB statements are not currently being provided to uninsured and uninsurable enrollees.
7. Of the 46 hard copy claims requested, one claim was not received and 6 of the hard copy claims
   reviewed contained data elements that did not match the system claims data.




                                                   90
8. MMCC did not report reliable claims aging data on its weekly claims processing reports submitted to
   the state. While the examiners were on site, MMCC corrected the reports that calculate the aging of
   processed claims.
9. Claims are not electronically controlled until they are actually adjudicated.

         MMCC subcontracts with the following vendors for the provision of specific benefits and the
processing and payment of related claims: MIM Health Plans Inc. (pharmacy benefits manager) and IPA
(vision). Because the subcontractors processed claims for these benefits, these claims were not included
in MMCC’s pool of claims.

OmniCare Health Plan, Inc. (OHP)
For the Period April 1, 2000 – June 30, 2000

Claims Processing Market Conduct Exam:

1. The data file provided by OHP could not be reconciled to the general ledger to within an acceptable
   limit.
2. OHP did not process claims in accordance with the TennCare contract. Ninety-six percent of all
   claims in the sample were processed within 60 days. The TennCare contract requires an MCO to
   process 100% of all claims within 60 days.
3. One of the 50 claims tested contained incorrect or missing data elements.
4. Three of the 50 claims tested were improperly denied.
5. OHP paid incorrect amounts for 2 of the 50 claims tested.
6. One claim was correctly denied; however, OHP’s claims system indicated a paid amount.
7. The claims status report submitted to TennCare on a weekly basis is not prepared correctly.

Limited Scope Financial Exam:

1. OHP’s originally submitted NAIC Statement for the Quarter Ended June 30, 2000 understated claims
   payable by $811,661. The understatement resulted in a statutory net worth deficiency of $679,608 for
   June 30, 2000. UA-TN (OPH’s parent company) purchased $900,000 preferred stock in OHP to fund
   the statutory net worth deficiency.
2. The medical loss ratio reports filed through September 30, 2000 revealed several discrepancies. The
   incurred but not reported (IBNR) component of the medical loss ratio report was not based on
   actuarial studies or previous historical payment patterns of medical claims. Administrative costs of
   $23,500 related to the claims processing fee of a pharmacy subcontractor was improperly included in
   the medical loss ratio report as medical expenses. Drug payments of $90,407 related to dates of
   service prior to July 1, 2000 were improperly included in the medical loss ratio report as medical
   expenses.
3. Subsequent to the examination period, OHP failed to notify Commence and Insurance that it had
   amended the management agreement with UA-TN. Amended management agreements requires the
   prior approval of the department.
4. OHP incorrectly reported $252,222 in funds held in escrow by providers as an admitted asset. Under
   NAIC guidelines, funds held in escrow are not readily available for the payment of claims and
   therefore should be classified as non-admitted assets.
5. Support for collection of $295,954 in accounts receivable due from providers was not provided and
   had been adjusted from net worth.




                                                  91
6. Premium revenues as of June 30, 2000 incorrectly included amounts improperly accrued in premium
   revenue for the year ended December 31, 1999 that were never collected. Premium revenues of
   $6,200 had been adjusted from net worth.

Title VI:

1. OHP is in compliance with Title VI.

        During the examination period, OHP subcontracted with vendors for the provision of pharmacy
benefits (MIM Health Plans, Inc.), dental services (Doral Dental), and vision services (Block Vision).
Because the subcontractors processed claims for their services, pharmacy, dental, and vision claims were
not included in OHP’s pool of claims and were not tested for compliance.

Preferred Health Partnership of Tennessee, Inc. (PHP)
For the Period January 1, 1996 – December 31, 1997

Claims Processing:

        Commerce and Insurance tested a sample of 100 claims received by PHP from January 1, 1997
through December 31, 1997. Section 2-18. of the TennCare contract requires 95% of clean claims to be
processed within 30 calendar days of receipt, with the remaining 5% to be processed within the next 10
calendar days. The contract also requires the MCO to process all claims, clean and non-clean, within 60
calendar days of receipt. The results of the testing were as shown below.

1. PHP adjudicated and considered all claims sampled clean; however, only 35 of the 100 claims
   sampled from PHP’s claims processing system were timely adjudicated in accordance with Section 2-
   18. of the TennCare contract. The following is a summary of results:
                       35 claims (35%) within 30 days of receipt,
                       77 claims (77%) within 40 days of receipt,
                       97 claims (97%) within 60 days of receipt, and
                        3 claims (3%) beyond 60 days of receipt.
2. PHP had not yet implemented electronic billing for its providers as of January 1, 1997, as required by
   TennCare contract Sections 2.2.g. and 2.18.
3. Three of 100 (3%) claims in the sample tested were denied inappropriately by PHP.
4. PHP is not coordinating member out-of-pocket limits with its behavioral health and substance abuse
   service provider, Tennessee Behavioral Health, Inc (TBH). This could potentially cause PHP’s
   TennCare members to exceed their annual out-of-pocket limitations since both PHP and TBH charge
   co-payments.

Enrollee Complaints and Appeals (formerly Grievances):

1. PHP has submitted internal grievance policies and procedures to the Bureau of TennCare as required
   under Section 2-9. of the TennCare contract. Based upon a sample of enrollee complaints and
   appeals reviewed by the examiners, PHP appears to be in compliance with Section 2-9. of the
   TennCare contract.

Financial Reporting and Analysis:

1. For the year ended December 31, 1997, PHP reported a loss of ($5,201,730) on its 1997 NAIC
   Annual Statement and its certified financial statements filed with the department on May 1, 1998.


                                                   92
   PHP reported total TennCare related revenues of $111,245,404, investment revenues of $1,369,035,
   net medical expenses of $104,676,262 (equal to 94.1% of total reported TennCare revenues), and
   administrative and tax expenses of $13,139,907 (equal to 11.8% of total reported TennCare
   revenues).
2. PHP was not in compliance with the minimum net worth requirement as prescribed in Sections 2-
   10.e.4. and 2-2.f. of the TennCare contract and Sections 56-32-212 and 56-32-216, Tennessee Code
   Annotated. PHP’s net worth, as adjusted during the examination, was deficient by $5,458,395 on
   December 31, 1997. However, PHP corrected this deficiency as of March 31, 1998, through capital
   contributions of $7.8 million from its ultimate parent, Covenant Health.
   Effective April 8, 1997, Section 56-32-212, Tennessee Code Annotated, was amended to revise the
   minimum net worth required to be maintained by HMOs operating in Tennessee. The new
   requirement is the greater of $1,500,000 or 4% of the first $150 million of annual premium revenues,
   and 1.5% of the annual premium revenue in excess of $150 million, as reported on the entity’s most
   recent NAIC Annual Statement. Existing HMOs were permitted a percentage phase-in until July 1,
   1998, to meet the full minimum net worth requirement. This phase-in was 50% of the minimum net
   worth on December 31, 1997, and 75% from January 1, 1998 through June 30, 1998. All of PHP’s
   premium revenues are derived from the TennCare Program
   PHP’s TennCare revenues were adjusted as a result of this examination to $111,014,598.
   Accordingly, PHP’s exam-adjusted minimum net worth requirement was revised to $4,440,584, or
   4% of $111,014,598. The revised statutes require PHP to maintain at least 50% of this requirement
   (or $2,220,292) on December 31, 1997, 75% of this requirement (or $3,330,438) from January 1,
   1998 through June 30, 1998, and 100% as of July 1, 1998. PHP’s net worth as of December 31,
   1997, was revised to ($3,238,103); however, Covenant Health’s infusion of $7.8 million as of March
   31, 1998, corrected this deficiency.
3. During March 1998, the state executed an agreement with PHP settling all saving disputes for Calendar Years
   1994 through 1996, at which time PHP operated as a PPO under a provider risk agreement with the state. PHP
   was granted a certificate of authority to operate as an HMO effective January 1, 1997. As an HMO, PHP is no
   longer required to calculate a savings or loss each year and may retain as administrative costs or profits any
   amounts not paid for medical services or premium taxes.
            The compromise agreement executed between PHP and the state during March 1998, stipulated that the
   state would accept $3,134,337 from PHP as settlement in full of its savings dispute with the state for calendar
   years 1994 through 1996. PHP had already paid $1,855,428 to the state at the time of the agreement, and later
   paid in the remainder as agreed.

Marketing Plan:

PHP has submitted all marketing plans and materials to the Bureau of TennCare for approval in
accordance with the TennCare contract. The Bureau of TennCare has provided TDCI with copies of all
correspondence evidencing approval of PHP’s marketing plans and materials for the period under
examination.

Provider Agreements:

1. Section 2-18. of the TennCare contract lists the minimum requirements that PHP’s executed provider
   agreements must contain. Certain provider agreements obtained and tested from PHP did not contain
   the provisions required under Sections 2-18.j., k., l., y., ee., and ll., of the contract.




                                                  93
Provider Complaints, Disputes and Arbitration:

1. PHP’s monthly provider appeals’ logs for 1997 were reviewed and a sample was selected for testing.
   Of approximately 802 appeals tracked in PHP’s log for 1997, only 122 indicated that a resolution had
   been reached as of the date of fieldwork (May 1998). From July 1997 through December 1997, 590
   appeals were entered in the log, and only 11 of these indicated a resolution date. Management was
   queried and responded that a significant backlog of unresolved provider appeals existed due to
   company downsizing and the unavailability of staff to handle the provider appeals. Therefore, PHP is
   not properly responding to provider disputes and appeals in accordance with its internal policies and
   procedures, and as required under Section 2-18.ee. of the contract.

Subcontracts and Other Statutory Approvals Required:

1. As of December 31, 1997, PHP had submitted all subcontracts to the TennCare Bureau for approval
   as required under Section 2-10. of the TennCare contract, but had not submitted a pharmacy
   subcontract to TDCI, as required by Section 56-32-203(c), Tennessee Code Annotated.
2. PHP received an approval from the Bureau of TennCare on February 23, 1998 for a revised member
   handbook; however, this handbook has not been submitted to TDCI for approval as required under
   Sections 56-32-203(b)(5) and (c), Tennessee Code Annotated. This constitutes a change in the
   evidence of coverage made available to plan enrollees, which must be submitted to TDCI for
   approval.

Title VI:

1. PHP evidenced to the examiners that it has adopted policies and procedures to monitor compliance
   with Title VI of the 1964 Federal Civil Rights Act and that PHP is in full compliance with Section 2-
   25. of the contract effective July 1, 1996, as amended by TennCare contract amendment number 2.

Premier Behavioral Systems of Tennessee, LLC
For the Period July 1, 1998 – June 30, 2000

Claims Processing Exam:

1. Premier incorrectly paid 9 of 60 claims reviewed.
2. Premier improperly denied 3 of 60 claims reviewed.
3. Premier inadequately reported encounter data required by the TennCare Partners contract. The
   encounter data did not include all revenue, procedure, and diagnosis codes.
4. Of 51 Regional Mental Health Institute claims reviewed, Premier improperly denied 29 claims.
5. Premier is not in compliance with Section 56-32-226(b), Tennessee Code Annotated, requirements for
   timely adjudication of claims.

Limited Scope Financial Exam:

1. Premier did not provide the examiners with requested information, specifically the general ledgers of
   an affiliate, which support the allocation of administrative expenses on the NAIC Financial
   Statements.
2. Premier understated Incurred But Not Reported (IBNR) at June 30, 2000. TDCI non-admitted
   unsupported health care receivables. Both items resulted in Premier’s June 30, 2000, net worth being
   overstated and adjusted by TDCI.



                                                   94
Other Deficiency:

1. Premier did not include in the provider agreements all requirements specified by Section 3.9.2 of the
   Partners contract.

Tennessee Behavioral Health
For the Period July 1, 1998 – June 30, 2000

Claims Processing Exam:

1.   TBH incorrectly paid three of 60 claims reviewed.
2.   TBH improperly denied two of 60 claims reviewed.
3.   Proper adjudication could not be determined for three of 60 claims.
4.   Proper claims processing lags could not be ascertained for four of 60 claims reviewed.
5.   TBH inadequately reported encounter data required by the TennCare Partners contract. The encounter
     data did not include all revenue, procedure, and diagnosis codes.
6.   Of 50 Regional Mental Health Institute claims reviewed, TBH incorrectly paid 18 claims.
7.   Of 50 Regional Mental Health Institute claims reviewed, TBH improperly denied 26 claims.
8.   Of 50 Regional Mental Health Institute claims reviewed, two claims did not contain all of the dates of
     service billed on the claim in TBH’s claims processing system.
9.   TBH is not in compliance with Section 56-32-226(b), Tennessee Code Annotated, requirements for
     timely adjudication of claims.

Financial Exam:

1. TBH did not provide the examiners with requested information, specifically the general ledgers of an
   affiliate, which support the allocation of administrative expenses on the NAIC Financial Statements.
2. TDCI non-admitted unsupported health care receivables of $707,718. This item resulted in TBH’s
   June 30, 2000, net worth being overstated and adjusted by TDCI.

Other Deficiencies:

1. TBH did not include in the provider agreements all the requirements specified by the TennCare
   Partners contract Section 3.9.2.
2. TBH is non-compliant with Section 3.4.2.9 of the TennCare Partners contract regarding the
   explanation of benefits to participants.

VHP, Inc.
For the Period October 1, 1995 – June 30, 1997

Claims Processing:

        The Division sampled and tested 112 claims received by VHP for dates of service of July 1, 1996
through June 30, 1997. Of the 112 claims tested, 81 (72%) of the claims were paid and 31 (28%) were
denied. All claims sampled were adjudicated and the results follow:

1. One hundred percent of all claims sampled for Julian date testing were entered into the Diamond
   system with the correct date of receipt.



                                                    95
2. Thirty-eight percent of all claims sampled from VHP’s claims processing system were
   timely adjudicated in accordance with Section 2-18. of the TennCare contract:

                       19% were processed within 30 days of receipt,
                       19% were processed within the next 10 days of receipt,
                       43% were processed within 41 -60 days of receipt, and
                       19% were processed after sixty days from receipt.

        (All claims were considered clean and thus 95% were required to be processed within 30
calendar days of receipt with the remaining 5% to be processed within 40 calendar days of receipt.
Section 2-18 requires all claims submitted be processed within sixty (60) days.)

3. One hundred percent of all claims sampled were accurately adjudicated based on eligibility and
   timely filing.
4. Ninety-four percent of all denied claims sampled were denied validly.
5. Seventy-five of all claims sampled were correctly priced in accordance with the Diamond system and
   provider contracts. Seven claims were incorrectly priced per the system of which four were
   incorrectly paid and three were denied. Twenty-one claims were incorrectly priced according to the
   provider contracts of which 13 were incorrectly paid and eight were denied. In addition, one claim
   that was priced correctly according to the system and provider contract was incorrectly paid.
   Therefore, 84% or 94 of all claims sampled were paid correctly.
6. One hundred percent of all claims sampled subject to deductibles/co-pays were paid correctly.
7. Eighty-seven percent of all system claims sampled when compared to the original hard-copy claims
   matched without exception.
8. During the examination period, electronic billing was not available to providers.

Enrollee Grievances:

1. VHP submitted revised grievance/complaint policy and procedures to the Bureau of TennCare on July
   31, 1997. All grievances sampled were processed in accordance with the Daniels v. Wadley Consent
   Order, TennCare Rule 1200-13-12.11, and TennCare contract’s Section 2-9 as amended by
   Amendment Number 3, effective January 1, 1997.

Financial Reporting and Analysis:

1. For the year ended December 31, 1995, VHP reported a net loss from TennCare operations totaling
   $1,116,158. However, VHP also reported losses associated with subsidiary operations equal to
   $3,174,818, which when combined with VHP’s net loss relative to TennCare operations, resulted in
   VHP’s reported net loss of $4,290,976.
2. For the year ended December 31, 1996, VHP reported net income from TennCare operations totaling
   $1,644,888. However, VHP reported losses associated with subsidiary operations equal to
   $5,585,200, which when offset by VHP’s net income relative to TennCare operations, resulted in
   VHP’s reported net loss of $3,940,312.
3. VHP’s net income relative to TennCare operations for the first six months of 1997 totaled $291,653.
   However, VHP reported losses associated with subsidiary operations equal to $1,350,282, which
   when offset by VHP’s net income relative to TennCare operations, resulted in VHP’s reported net
   loss of $1,058,629 for the period January 1, 1997 through June 30, 1997.




                                                  96
4. The Division’s examination adjusted VHP’s reported net worth at June 30, 1997 of $3,974,068 to
   $3,371,143 which satisfied VHP’s minimum net worth requirement pursuant to Sections 2-10.e.4 and
   2-2.f of the TennCare Contract and Sections 56-32-212 and 56-32-216, Tennessee Code Annotated.

Marketing Plan:

VHP’s marketing plan and materials for the 1995 change period were submitted to and approved by the
TennCare Bureau. VHP has not submitted any additional marketing materials to the TennCare Bureau.

Provider Agreements:

1. Section 2-18. of the TennCare contract lists the minimum requirements that VHP’s executed provider
   agreements must contain. None of the provider agreements reviewed for compliance with Section 2-
   18 completely complied with Section 2-18 requirements. Several requirements were excluded from
   all agreements; several requirements were included in some agreements but excluded from other
   agreements; the agreements have not incorporated Amendment 2 and Amendment 3 changes to
   Section 2-18; one VHP requirement contained in several agreements directly violated a Section 2-18
   requirement; and another requirement did not fully incorporate a Section 2-18 requirement.

Subcontracts:

1. VHP has not submitted two of its four subcontracts to the TennCare Bureau for approval, as required
   by Section 2-10. of the TennCare Contract.

Title VI:

1. VHP complied with all requirements of Section 2-25 of the TennCare Contract except for inquiring as
   to the race and/or national origin of its providers.

Volunteer State Health Plan (VSHP)
For the Period January 1, 2000 – March 31, 2000

Claims Processing Market Conduct Exam:

1.   VSHP did not process 100% of all claims within 60 days of receipt.
2.   Two of 44 denied claims did not reflect all denial reasons.
3.   The coinsurance or deductible was not properly calculated on two claims.
4.   The data reported on two claims was not correctly entered into the claims processing system.
5.   The Claims Status Report submitted to TennCare on a weekly basis was not prepared correctly.
6.   Adequate documentation was not maintained for all provider complaints.
7.   Control of incoming claims was not established immediately in the mailroom.

Limited Scope Financial and Compliance Exam:

1. Outstanding checks were incorrectly reported as liability.
2. Claims Payable was significantly overstated.

Title VI:

1. VSHP is in compliance with Title VI.


                                                   97
         VSHP subcontracted with vendors for pharmacy claims processing (AdvancePCS, Inc.) and
dental services (Doral Dental). Because the subcontractors processed claims for these benefits, pharmacy
and dental claims were not included in the population of VSHP claims from which claims were selected
for testing. The claims processing by subcontractors were analyzed only for compliance with timely
claims processing requirements of Section 2-18 of the TennCare contract.




                                                  98
                                      Appendix 4
     Summary of Regulatory Actions for Xantus (formerly known as Phoenix Health of
                                   Tennessee [PHT])
                          April 8, 1998 – November 19, 2001

       DATE                                                  ACTION
April 8, 1998     DCI notifies PHT of a $2.3 million “reported” net worth deficiency based on combined
                  1997 revenue of PHT and Health Net and requests that PHT provide a plan of corrective
                  action within 30 days (May 8, 1998). First deficiency notice.
April 13, 1998    PHT disputes DCI’s calculation of the minimum net worth. PHT claims the required net
                  worth should be calculated on basis of PHT’s 1997 revenue only, disregarding Health Net’s
                  1997 revenue.
April 27, 1998    DCI internal memo expresses concerns regarding (1) PHT’s net worth deficiency and the
                  increase in the deficiency to $6,496,758 should the federal income tax receivable of
                  $4,148,529 be non-admitted; (2) PHT’s anticipated net loss of $500,000 for the 1st quarter
                  of 1998; and (3) PHT’s inability to achieve a medical loss ration of 80% or less (required to
                  pay off the debt acquired in the Health Net acquisition/merger pursuant to PHT’s pro forma
                  financial statement).
April 30, 1998    DCI forwards PHT’s dispute letter dated April 13, 1998 to the F&A Commissioner.
May 27, 1998      DCI requests the TennCare Bureau verify PHT’s assertions that it expects to receive
                  approximately $4 million in additional adverse selection payments for 1996 and 1997.
May 28, 1998      The TennCare Bureau tells DCI that it cannot substantiate PHT’s estimate of additional
                  adverse selection payment.
June 4, 1998      DCI sends letter demanding PHT submit within 30 days a plan to correct the $2.3 million
                  “reported” net worth deficiency. PHT is notified that DCI does not accept PHT’s net worth
                  calculation. Second deficiency notice.
July 6, 1998      PHT requests a 30 day extension of the deadline to submit the plan of correction based on
                  PHT’s alleged inability to locate a policy position paper published by the NAIC.
July 13, 1998     DCI is advised to seek the opinion of the Attorney General on the legality of using the
                  combined revenue of PHT and Health Net to calculate minimum net worth.
July 13, 1998     In an internal memo to the DCI Commissioner, the Deputy Commissioner recommends
                  PHT’s request for a 30-day extension be denied or granted only on the condition of no
                  further extensions. PHT had more than 90 days to correct the deficiency (although statute
                  allows 30 days). The phase in for the new net worth requirement, which was completed
                  July 1, 1998, increased PHT’s “reported” net worth deficiency from $2.3 to $4.1 million.
                  The memo notes that PHT continues to lose money and its financial position is
                  significantly worse than projected in the pro forma financial statements filed with the
                  Health Net acquisition/merger.
July 20, 1998     TDCI grants PHT an extension of 31 days from the date of its request for an extension
                  (7/6/98), resulting in a due date of August 6, 1998, for the plan of correction. PHT is
                  advised that its current financial position is significantly worse than projected in the pro
                  forma financial statements filed as part of the Health Net acquisition/merger.
July 23, 1998     DCI decides not to seek an Attorney General’s opinion on the issue of PHT’s minimum net
                  worth calculation.
August 6, 1998    PHT’s newly-hired controller requests an additional one week extension to complete the
                  plan of correction based on (1) his recent hiring; (2) the interference of DCI’s recent
                  examination of PHT with PHT’s staff working on the plan; and (3) the CEO’s out-of-town
                  commitments.
August 7, 1998    DCI grants PHT a one-week extension and advises PHT to correct the net worth deficiency
                  by August 13, 1998. Third deficiency notice.
August 13, 1998   PHT submits a corrective action plan. First corrective action plan.
August 14, 1998   DCI internal memo regarding preliminary review of PHT’s corrective action plan relative
                  to the pro forma financial statements indicate the following concerns: (1) PHT reported
                  negative cash of $1.1 million at 6/30/98; (2) PHT accrued $7.2 million more in adverse



                                                   99
                     selection payments than allowed by DCI; (3) PHT proposed $20 million of capital
                     investments into PHT - $10 million from the Nations Bank line of credit and $10 million
                     from the sale of stock; and (4) claims liability was reduced by $6 million from the 2nd and
                     3rd quarter in 1998.
August 14, 1998      DCI internal memo regarding preliminary review of 1st Quarter 1998 NAIC Statement
                     indicates PHT’s “reported” net worth deficiency as $5 million. PHT’s corrective action
                     plan indicates a net loss for 1998 of $7.3 million and a net worth deficiency of $11 million
                     at 12/31/98. PHT proposes to correct the net worth deficiency by infusing $10.5 million of
                     additional capital by 12/31/98 and operating more efficiently. PHT also attempts to
                     renegotiate the use of funds provision in the $22.5 million line of credit with Nations Bank
                     to allow statutory equity and/or working capital infusions in subsidiaries. In the memo,
                     DCI concludes that PHT’s proposed corrective action plan does not rectify the current net
                     worth deficiency and is so contingent in nature that it does not present reliable evidence the
                     PHT’s net worth deficiency will be corrected “in the foreseeable future – if at all”.
August 18, 1998      DCI notifies the F&A Commissioner that PHT is significantly out of compliance with
                     Section 2-10.e.4 of the State’s TennCare Contract and recommends a hearing be set.
September 3, 1998    DCI internal memo regarding preliminary review of 2nd Quarter NAIC Statement indicates
                     “reported” net worth deficiency on face of statement of $5.5 million and after adjustments
                     due to non-admitted assets and claims payable an adjusted net worth deficiency of $33.2
                     million. The memo notes that the financial statements indicate PHT is in serious financial
                     distress.
September 4, 1998    DCI internal memo concurs with F&A Commissioner’s recommendation to require PHT to
                     obtain a capital infusion of $5 million by 9/15/98 and to correct any further net worth
                     deficiency by 12/15/98.
September 9, 1998    DCI notifies PHT that its proposed plan of correction, as set forth in the 8/13/98 letter, does
                     not rectify the net worth deficiency and lacks specificity and that DCI cannot accept
                     unsupported and contingent possibilities to cure a significant net worth problem. PHT
                     must present evidence by 9/25/98 that a capital infusion of $5 million was obtained. PHT
                     must also present evidence by 12/15/98 that any further net worth deficiency has been
                     rectified.
September 14, 1998   DCI asks PHT if its claims appeals process has been revised.
September 17, 1998   DCI requests that the TennCare Bureau subject PHT to a 10% capitation withhold should
                     PHT fail to meet the $5 million capital infusion requirement by 9/25/98.
September 17, 1998   Results of a TennCare Bureau provider survey of PHT indicates PHT’s providers are
                     refusing to accept new patients and PHT does not know who is participating in its provider
                     network.
September 22, 1998   DCI informs F&A Commissioner that PHT’s net worth deficiency at 7/1/98 is a minimum
                     $3 million and may be as high as $30 million due to non-admitting certain receivable.
                     (Calculation based only on PHT’s premium revenue reported on the Annual Statement.)
September 22, 1998   PHT questions DCI’s net worth calculations. Since the issue is being addressed by the
                     Attorney General, PHT requests the deadline for the $5 million capital infusion be
                     extended until the AG opinion is rendered.
September 23, 1998   DCI responds to attorney’s request for calculation of PHT’s net worth deficiency.
September 23, 1998   The TennCare Bureau notifies PHT of a 10% withhold if PHT does not provide by 9/25/98
                     evidence of curing its net worth deficiency.
September 30, 1998   The TennCare Bureau notifies PHT that its 9/22/98 request for an extension to cure net
                     worth deficiency has been denied.
October 13, 1998     DCI internal memo notes State of Mississippi findings of PHM’s (Phoenix Health of
                     Mississippi) net worth deficiency.
October 15, 1998     DCI internal memo mentions that PHT may have taken TennCare money to cure the
                     Mississippi deficiency.
October 23, 1998     Memo from DCI Deputy Commissioner to DCI Commissioner and F&A Commissioner
                     discusses the State of Mississippi’s concerns regarding Phoenix’s ability to continue.




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October 30, 1998    DCI internal memo discusses review of PHT’s 1st and 2nd Quarter 1998 NAIC Statements.
                    First Quarter “reported” net worth of $2.1 million “adjusted” to $4.7 million resulting in
                    adjusted net worth deficiency of $10 million at 3/31/98 and $11.7 million at 7/1/98.
                    Second Quarter “reported” net worth of $1.6 million “adjusted” to $26.2 million resulting
                    in “adjusted” net worth deficiency of $31.4 million at 6/30/98 and $33.2 million at 7/198
                    (net worth adjusted for certain non-admitted receivables and claims payables). Draft letter
                    and draft examination report sent to F&A Commissioner, DCI Commissioner, and Health
                    Commissioner.
November 3, 1998    Draft working copy of Agreed Order of Supervision sent to F&A Commissioner, DCI
                    Commissioner, and Health Commissioner.
November 5, 1998    Revised working copy of Agreed Order of Supervision sent to F&A Commissioner, DCI
                    Commissioner, and Health Commissioner.
November 12, 1998   DCI Commissioner notifies F&A Commissioner that a Notice of Administrative
                    Supervision places PHM under supervision of the Mississippi Insurance Department.
November 30, 1998   A Confidential Agreed Order of Supervision is issued, appointing Joseph P. Keane as
                    Supervisor effective 11/30/98 and expiring 2/26/99.
December 10, 1998   DCI notifies PHT of review of PHT’s 1st and 2nd Quarter 1998 NAIC Statements. First
                    Quarter “reported” net worth of $2.1 million “adjusted” to ($4.7 million) resulting in
                    adjusted net worth deficiency of $10 million at 3/31/98 and $11.7 million at 7/1/98.
                    Second Quarter “reported” net worth of $1.6 million “adjusted” to ($26.2 million) resulting
                    in “adjusted” net worth deficiency of $31.4 million at 6/30/98 and $33.2 million at 7/198
                    (net worth adjusted for certain non-admitted receivables and claims payables). DCI
                    requests that PHT respond by 12/31/98. First deficiency notice for 1st and 2nd Quarters,
                    1998.
December 10, 1998   DCI sends PHT a draft examination report for the period 7/1/96-3/31/98.
December 17, 1998   PHT discusses progress toward correcting examination deficiencies. (i.e., searching for
                    additional investment capital; in the process of implementing KPMG’s operational
                    recommendations; a 12-day turnaround for member appeals; and is revising provider
                    agreements).
December 21, 1998   DCI memo concerns the release of PHT’s September and October 10% Withholds by the
                    Dept. of Health.
January 8, 1999     DCI is advised that the terms of the Agreed Order require DCI to keep 3rd Quarter NAIC
                    Statement confidential.
January 14, 1999    PHT prefers that DCI release the Amended 3rd Quarter NAIC Statement without
                    explanation of the Order of Supervision.
January 15, 1999    Supervisor notifies PHT of review of PHT’s 3rd Quarter NAIC Statement. “Reported” net
                    worth of ($3.4 million) “adjusted” to ($30.4 million) resulted in a net worth deficiency of
                    $37.5 million at 9/30/98. (Net worth adjusted for certain non-admitted receivables.) PHT
                    must provide a written plan for correcting the net worth deficiency by 1/29/99. First
                    deficiency notice for 3rd Quarter 1998.
January 27, 1999    First HCFA conference call includes Health Deputy Commissioner and TennCare Bureau
                    Director.
January 29, 1999    XHT submits amended 3rd Quarter NAIC Statement and a written plan for correcting the
                    net worth deficiency. XHT also submits a proposed TennCare Provider Agreement for
                    review and approval.
January 29, 1999    DCI requests the Commissioner of Mississippi Department of Insurance provide copies of
                    all filings received from Xantus Corp. and any affiliates.
February 2, 1999    DCI accepts XHT’s amended 3rd Quarter NAIC Statement as filed.
February 5, 1999    XHT requests that the Commissioner of Health close XHT enrollment until further notice.
February 9, 1999    Peterson briefing includes officials from DCI and Health.
February 12, 1999   TennCare Bureau notifies XHT that all deficiencies previously identified in 1/26/99
                    correspondence have been corrected. The Bureau will release withholds for 11/98 and
                    12/98.
February 12, 1999   State of Arkansas submits copies of Xantus Corp. filings to DCI.



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February 17, 1999   XHT submits a written plan for correcting the net worth deficiency to the State
                    Comptroller. The document included two financial projection spreadsheets that were not
                    previously filed with DCI.
February 22, 1999   DCI officials meet with XHT to negotiate terms of the agreed order.
February 22, 1999   Second HCFA briefing includes DCI and Health officials. DCI Deputy Commissioner
                    reviews the restructuring plan provided by PHT.
February 23, 1999   Peterson Worldwide, LCC faxes information to DCI that reflects a g/l balance sheet net
                    income of ($13.1 million) for 1998.
February 26, 1999   Draft Peterson Report is issued.
February 26, 1999   DCI officials meet with XHT to negotiate the Agreed Order. XHT says its trying to close
                    the books for 1998 and will file the 1998 Annual NAIC Statement with DCI by the
                    deadline date (3/1/99). XHT explains the filing may need revision after accounting for
                    1998 is finalized (by 3/5/98).
March 1, 1999       First Modified Agreed Order of Supervision for XHT is issued and appoints Kevin O’Brien
                    as supervisor. The Agreed Order was signed 2/26/99.
March 4, 1999       DCI examiner notes that XHT did not file its actuarial statement on time (3/1/99).
March 4, 1999       DCI requests the actuarial statement. XHT official will check on the status. XHT told DCI
                    that independent auditors want to delay their actuarial estimate until April in order to have
                    more paid claims lag data (and have a more accurate prior-year estimate).
March 4, 1999       DCI apprises F&A Commissioner of the 12/13/98 NAIC filing, the reported net loss of $27
                    million for 1998, and the potential adjusted net worth deficiency of $50 million.
March 5, 1999       DCI learns from F&A that XHT’s pharmacy account with MIM Health Plans is past due
                    $5,073,912 as of 3/5/99 and $6,254,748 as of 3/8/99.
March 11, 1999      DCI notifies XHT of incomplete filing of the 1998 Annual Statement – missing actuarial
                    statement, SVO certification, notes to financial statements, and Medicare supplement.
March 15, 1999      DCI internal memo discusses review of 4th Quarter and Annual 1998 NAIC Statements. At
                    12/31/98, “reported” net worth of ($24.4 million) “adjusted” to ($43.1 million) resulted in
                    adjusted net worth deficiency of $50.7 million. (Net worth adjusted for certain non-
                    admitted receivables.)
March 17, 1999      DCI provides XHT a proposed amendment (Third Party Modified Agreed Order of
                    Supervision) to the Administrative Supervision Order proposing to incorporate Xantus
                    Corporation (XC) as a party to the Order of Administrative Supervision to reflect and
                    incorporate the responsibility of XC for the financial and operational aspects of the XHT
                    HMO.
March 24, 1999      In response to the 3/11/99 notification for incomplete filing, XHT tells DCI that the actuary
                    will provide the actuarial statement only after KPMG (XHT’s outside auditors) has
                    completed its claims payable analysis.




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                               Xantus Rehabilitation-Court Actions
                               March 31, 1999 – November 19, 2001

                                           Davidson County Court
March 31, 1999       •   Appointment of Special Deputy Receiver, David Manning
                     •   Appointment of Special Deputy Receiver, Manny Martins
                     •   Verified Petition for Entry of Consent Order Appointing DCI Commissioner Receiver
                         for Purposes of Rehabilitation; and Injunction
April 1, 1999        •   Rehabilitator’s Motion for Approval of Continued Payment
                     •   Agreed Order Approving of Continued Payment
                     •   Motion to Set Aside Restraining Order and/or Lift Stay
                     •   Order Lifting Stay
May 28, 1999         •   Initial Report of Special Deputy Rehabilitators
June 17, 1999        •   Xantus Corp.’s Proposal for Continued Rehabilitation of XHT
June 22, 1999        •   Notice of Filing of Proposal for Rehabilitation and Request for Status Conference
June 24, 1999        •   Petitioner’s Response to Xantus Corp.’s Proposed Plan of Rehabilitation
September 2, 1999    •   Proposed Plan for Operation and Reorganization of Xantus during Rehabilitation
                     •   Motion for Scheduling Order
September 3, 1999    •   Report of the Special Deputy Rehabilitators
September 13, 1999   •   Response of MIM Health Plans, Inc., to Petitioner’s Motion for Scheduled Order
                     •   Motion of MIM Health Plans, Inc., to Modify Proposed Plan for Operation and
                         Reorganization of Xantus during Rehabilitation
October 8, 1999      •   Motion of MIM Health Plans, Inc., to Intervene as a Party in Rehabilitation of Xantus
                     •   Petitioner’s Motion for Protective Order
                     •   Petitioner’s Memorandum in Support of Motion for Protective Order
October 27, 1999     •   MIM Health Plans, Inc.’s, Reply in Support of Motion to Expedite Discovery
October 29, 1999     •   Proposed Plan for Payment of Pre-Rehabilitation Provider Debt
                     •   Notice of Hearing with Respect to Previously Filed Motion of MIM Health Plans, Inc.,
                         to Modify Proposed Plan for Operation and Reorganization of Xantus during
                         Rehabilitation
November 5, 1999     •   Memorandum Submitted on Behalf of the Pharmacists Association in Support of
                         Proposed Plan
                     •   Comments and Objections of MIM Health Plans, Inc., with Respect to Proposed Plan
                         for Operation and Reorganization of Xantus during Rehabilitation
November 9, 1999     •   Provider Committee’s Response to Deputy Rehabilitators Proposed Plan for Payment
                         of Pre-Rehabilitation Provider Debt
November 12, 1999    •   Presentation by the Special Deputy Receiver for Xantus
November 16, 1999    •   Memorandum and Order
December 30, 1999    •   Motion for Approval of Third Party Contractors’ Fees
                     •   Motion for Approval of Interim Fees of Special Deputies
January 6, 2000      •   Order Approving to File Fees Summaries of Outside Counsel and Litigation Support
                         Contractors, and Approving the Filing under Seal of Invoices Containing Detailed
                         Descriptions of Services
January 14, 2000     •   Supplement to Proposed Plan for Rehabilitation of Xantus
January 18, 2000     •   Order
January 19, 2000     •   Memorandum and Order
                                                         Court of Appeals
January 20, 2000     •   Notice of Extraordinary Appeal and Motion for Immediate Stay
                     •   Application of the State of Tennessee for Extraordinary Appeal by Permission
                         Pursuant to Tenn. R. P. 10, Including Motion for Immediate Stay
January 21, 2000     •   Supplement to Application of the State of Tennessee for Extraordinary Appeal by
                         Permission Pursuant to Tenn. R. P. 10, Including Motion for Immediate Stay Order



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January 27, 2000     •   Order
February 25, 2000    •   Brief of Appellant, State of Tennessee, ex rel. Anne B. Pope
                     •   Appendix to Brief of Appellant, State of Tennessee, ex rel. Anne B. Pope
                     •   Motion to File Amicus Curiae Brief Of the Bureau of TennCare
                     •   Notice of Filing Appendix to Amicus Curiae Brief Of the Bureau of TennCare
                     •   Appendix to Amicus Curiae Brief Of the Bureau of TennCare
                     •   Motion of the Tennessee Health Care Campaign to participate as Amicus Curiae in
                         Support of the Petitioner/Appellant
                     •   Brief of Amicus Curiae Tennessee Health Care Campaign
                     •   Brief of the Providers’ Committee and Appendix
                     •   Notice of Filing of Affidavits (Providers’ Committee)
                     •   Motion of Providers’ Committee for Court to Consider Post-Judgment and other Facts
                         Not in the Appellate Record
                     •   Brief of Xantus Corporation
March 6, 2000        •   Order (Oral Argument)
                     •   Brief of James F. Blumstein, Amicus Curiae
March 9, 2000        •   Reply Brief of Appellant, State of Tennessee, ex rel. Anne B. Pope
                     •   Reply Brief of the Bureau of TennCare
May 17, 2000         •   Order (Reverse Chancellor and Remand for Further Proceedings)
May 31, 2000         •   Motion for Award of Fees
June 30, 2000        •   Order
July 26, 2000        •   Mandate of the Court of Appeals Issued to Chancery Court
                                          Davidson County Court
August 30, 2000      •   Order Approving Motion to File Fee Summaries of Outside Counsel and Litigation
                         Support Contractors, and Approving the Filing under Seal of Invoices Containing
                         Detailed Description of Services
September 18, 2000   •   Status Report of Rehabilitation of Xantus Healthplan of Tennessee, Inc.
                     •   Renewed Application for Approval of Fees of Special Deputy Rehabilitators, Outside
                         counsel, and Third-Party Contractors
September 29, 2000   •   Motion to Admit Pro Hoc Vice
                     •   Answer
October 5, 2000      •   Notice of Filing Appointment of Special Deputy Receiver Richard K. Sandstrom
March 8, 2001        •   CONFIDENTIAL Report and Recommendation of Special Master John C. Neff on the
                         Renewed Application for Approval of Fees
March 19, 2001       •   Fourth Status Report of Rehabilitation of Xantus Healthplan of Tennessee, Inc.
March 22, 2001       •   Commissioner’s Response and Objections to Report and Recommendation of Special
                         Master
                     •   Response of Peterson Consulting to the Initial Report and Recommendation of the
                         Special Master
April 12, 2001       •   Samuel H. Howard and Xantus Corporation’s Motion to Set
                     •   Samuel H. Howard and Xantus Corporation’s Petition for an Order Terminating
                         Rehabilitation
April 23, 2001       •   Petitioner’s Response in Opposition to Samuel H. Howard and Xantus Corporation’s
                         Motion to Set
April 25, 2001       •   Rehabilitation Update and Notice of Potential Third Phase of the Plan of
                         Rehabilitation for Xantus Healthplan of Tennessee, Inc.
May 9, 2001          •   Report and Recommendation of Special Master John C. Neff on the Renewed
                         Application for Approval of Fees of Peterson and Sandstrom
May 15, 2001         •   Motion for Approval of Fees of Special Deputy Rehabilitators, Outside Counsel, and
                         Third Party Contractors
June 5, 2001         •   Application for Approval of Fees of Special Master John C. Neff



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                     •   Application for Approval of Fees of Counsel for the Special Master
                     •   Motion for Approval of Fee Application for Special Master John C. Neff and Counsel
                         to Special Master
June 8, 2001         •   Response and Objections of Peterson Consulting to the Report NS Recommendation of
                         the Special Master
                     •   Response and Objections of Peterson Consulting to the Report and Recommendation
                         of the Special Master John C. Neff on the Renewed Application for Approval of Fees
                         of Peterson and Sandstrom
June 29, 2001        •   Supplement to Report and Recommendation of the Special Master John C. Neff on the
                         Renewed Application for Approval of Fees of Peterson and Sandstrom and
                         Recommendation as to Auditors Report and Recommendation of the Special Master
                         John C. Neff on the Renewed Application for Approval of Fees of Peterson and
                         Sandstrom Report and Recommendation of the Special Master John C. Neff on the
                         Renewed Application for Approval of Fees of Peterson and Sandstrom
July 9, 2001         •   Response to Motion for Approval of Fee Application for Special Master and Counsel
                         and Renewed, Continuing, and Supplemental Objections to Reports and
                         Recommendations of Special Master and to the Conduct of the Special Master
                         Proceedings
July 16, 2001        •   Response and Objections to Supplement to Report and Recommendation of the Special
                         Master on the Renewed Application for Approval of Fees of Peterson and Sandstrom
July 27, 2001        •   Memorandum of Law Regarding Authority for Sale of Xantus Healthplan of
                         Tennessee, Inc., Pursuant to TCA 56-9-303(e)
August 3, 2001       •   Agreed Order Re-Setting Hearing on Sam Howard’s Petition to Terminate
                         Rehabilitation
                     •   Notice of Filing Transcript and Motion to Supplement Petitioner’s Response to
                         Questions From the Court
August 31, 2001      •   Petitioner Samuel H. Howard’s Responses to Receiver’s First Set of Interrogatories
                     •   Petitioner Samuel H. Howard’s Responses to Receiver’s First Request for Production
                         of Documents
September 17, 2001   •   Plan for Rehabilitation of Xantus Healthplan of Tennessee, Inc., Pursuant to TCA 56-
                         9-303(3)
September 27, 2001   •   Deposition of Jimmy Blisset
October 1, 2001      •   Motion for Order Establishing Notice to be Given of Plan of Rehabilitation, Hearing
                         on Plan and Time for Response
October 2, 2001      •   Deposition of Sam Howard
October 3, 2001      •   Deposition of Peggy Seay
October 5, 2001      •   Deposition of Glen Page
October 10, 2001     •   Deposition of John Lyle
                     •   Response to Petition of Samuel H. Howard for an Order Terminating Rehabilitation
October 11, 2001     •   Deposition of Stefan Boedeker
                     •   Notice of Filing
                     •   Petitioner’s Brief in Opposition to Sam Howard’s Petition to Terminate Rehabilitation
October 12, 2001     •   Samuel H. Howard’s Memorandum in Support of Petitioner for an Order Terminating
                         Rehabilitation
                     •   Report and Recommendation of Special Master John C. Neff on the Plan for
                         Rehabilitation Filed by Commissioner Anne B. Pope
October 15, 2001     •   Draft Transcript of October 15, 2001 Hearing
October 16, 2001     •   Draft Transcript of October 16, 2001 Hearing
October 17, 2001     •   Transcript of October 17, 2001 Hearing
October 19, 2001     •   Draft Transcript of October 19, 2001 Motion Hearing
October 26, 2001     •   Transcript of October 26, 2001 Chamber Conference
                     •   Transcript of October 26, 2001 Hearing
October 29, 2001     •   Transcript of October 29, 2001 Hearing



                                                    105
October 29, 2001      •   Summary of Manny Martins’ Testimony at October 26 and 29, 2001 Hearing
October 30, 2001      •   Transcript of October, 30, 2001, Hearing
November 7, 2001      •   Agreed Scheduling Order
November 19, 2001     •   Agreed Order

        As of December 2002, according to the TennCare Bureau Web site, Xantus continues to be on a “no-risk”
reimbursement for reasonable cost in accordance with the contract amendment between Xantus and the TennCare program.




                                                    106
                                          APPENDIX 5
                               Summary of Regulatory Actions for
                   Access MedPlus/Tennessee Coordinated Care Network (TCCN)
                                  June 14, 1999 – March 1, 2002

         DATE                                                    ACTION
June 14, 1999          DCI issues Agreed Order of Supervision as a result of TCCN’s failure to meet statutory
                       net worth requirements. Order affords Commissioner greater access to TCCN records and
                       operations. A supervisor is appointed.
August 6, 1999         Supervisor issues First Supervisor Directive. TCCN was previously directed to file a plan
                       of correction to remedy its net worth deficiency on or before July 14, 1999. The plan filed
                       was incomplete, so TCCN was directed not to expend any funds paid to TCCN pursuant
                       to the retroactive cap increase for FY 1999, without the prior written approval of the
                       supervisor.
September 9, 1999      Supervisor issues Termination of Supervisor Directive, terminating August 1999
                       directive. Because of continued statutory net worth deficiencies, DCI extends supervision
                       of TCCN by issuing First Amended Agreed Order of Supervision.
November 9, 1999       DCI issues Second Amended Agreed Order of Supervision (thereby extending supervision
                       of TCCN), because of continued statutory net worth deficiencies.
November 30, 1999      Supervisor issues Supervisor’s Second Directive. TCCN did not file a complete plan of
                       correction as directed. Claims processing defects are noted. TCCN and its management
                       company are directed not to incur any expense or other financial liability or expend any
                       funds paid by the state for marketing or advertising activities, without the Supervisor’s
                       prior written approval or until Supervisor terminates this directive.
January 12, 2000       DCI issues Third Amended Agreed Order of Supervision due to continuing statutory net
                       worth deficiencies, extending supervision of TCCN.
January 20, 2000       DCI issues Fourth Amended Agreed Order of Supervision effective through midnight,
                       February 2, 2000, due to continuing statutory net worth deficiencies.
February/March         DCI issues Letter of Examination for on-site review of all TCCN’s financial and claims
2000                   processing operations.
April 2000             DCI notifies TCCN of defects in claims processing operations and financial operations
                       and schedules an evidentiary hearing. TCCN submits an information systems service
                       recovery cure plan, a claims processing initiative plan, a provider recontracting/pricing
                       cure plan, and a member services cure plan.
May 10, 2000           DCI issues Notice of Administrative Supervision due to TCCN’s net worth and claims
                       processing deficiencies. Under authority of Section 56-9-101 et seq., Tennessee Code
                       Annotated, TCCN is placed under Administrative Supervision. TCCN must meet its
                       statutory minimum net worth requirements, comply with its cure plans, demonstrate that
                       its telephone customer service center is meeting industry minimums, and demonstrate it
                       established an interim internal audit function no later than May 19, 2000. TCCN and its
                       management company are required to cooperate with DCI and the Supervisor. A new
                       supervisor is appointed. During the period of supervision, TCCN may not make any
                       disbursements or engage in any of a detailed list of business transactions without prior
                       approval of the Commissioner or the Supervisor.
May 22, 2000           Supervisor issues Supervisor’s First Directive and Cease and Desist Order. TCCN is
                       directed to pay management fees to Medical Care (MCMC) rendered May 2000. TCCN
                       is also ordered to cease and desist making payments to MCMC pursuant to its
                       management agreement based upon any methodology used to calculate the management
                       fee payable to MCMC that may include amounts of money not actually paid to TCCN by
                       the state.
September 20, 2000     DCI issues First Amended Agreed Notice of Administrative Supervision to extend May
                       10th Order of Administrative Supervision until DCI can verify that TCCN has: (a) met its
                       statutory minimum net worth requirements; (b) met its statutory claims processing



                                                       107
                     requirements; and (c) established an internal audit function. Supervision expires June 30,
                     2001, unless parties agree to extend.
January 3, 2001      DCI submits Verified Petition for Appointment of Receiver to Chancery Court of
                     Davidson County.
January 17, 2001     Chancery Court issues Memorandum Opinion dismissing the petition to rehabilitate
                     TCCN and directing attorneys to prepare an order consistent with the memorandum
                     opinion. The memo concludes that TCCN had met its statutory net worth require-ment,
                     notes that TCCN is correcting its claims processing problems, and dismisses the
                     Commissioner’s concerns that TCCN’s provider network has diminished.
January 26, 2001     The Chancery Court files an order dismissing the petition to appoint a receiver for the
                     purpose of rehabilitating TCCN.
March 2001           Schaller Anderson assists in the evaluation of TCCN’s progress in implementing its
                     claims processing system.
                     DCI hires Reden and Anders to assist in the actuarial analysis of TCCN’s financial status.
May 10, 2001         DCI issues Confidential Notice of Administrative Hearing to determine if conditions
                     giving rise to Administrative Supervision continue to exist. A hearing is scheduled for
                     June 20-22, 2001.
May 18, 2001         DCI issues First Set of Interrogatories and First Set of Requests for Production of
                     Documents, requiring TCCN to specify all reasons it believes it complies with statutory
                     minimum net worth requirements, statutory claims processing requirements, and internal
                     audit function requirements.
June 4, 2001         TCCN issues First Set of Interrogatories and First Set of Production requests to DCI.
June 6, 2001         DCI provides Notice of Witness, giving notice of witnesses it intends to call at the
                     hearing.
June 8, 2001         DCI files Memorandum of Law to address the issue of which party has the burden of
                     proving that TCCN does or does not comply with the requirements of the First Amended
                     Agreed Notice of Administrative Supervision. The memo concludes that TCCN has that
                     burden.
June 11, 2001        DCI answers TCCN’s First Set of Interrogatories stating that DCI has evidence which
                     indicates TCCN does not meet statutory net worth requirements, claims processing
                     requirements, or internal audit function requirements.
June 19, 2001        DCI issues Second Amended Agreed Order of Supervision and Final Order. TCCN
                     agrees to extend Administrative Supervision to March 1, 2002. The Second Amended
                     Agreed Order of Supervision will become the Final Order.
July 2001            DCI advises Finance and Administration (F&A) Deputy Commissioner of the Second
                     Amended Agreed Notice of Supervision and updates the current status of TCCN’s claims
                     processing and financial position.
August 2001          DCI updates F&A Deputy Commissioner of the status of TCCN’s financial position,
                     claims processing issues, and provider network claims, and provider network issues.
September 19, 2001   F&A Commissioner and Deputy Commissioner give written notice to TCCN of the state’s
                     intent to terminate TCCN’s provider risk agreement effective October 31, 2001, unless
                     TCCN provides sufficient proof of contractual compliance. TCCN must submit past due
                     audited financial statements for FY 2000 and NAIC Quarterly Financial Statements for
                     the period ended June 30, 2001.
October 2, 2001      TCCN sends counterproposal to F&A Commissioner and Deputy Commissioner.
October 5, 2001      F&A Deputy Commissioner sends letter to TCCN regarding information requested in the
                     September 19, 2001, letter.
October 12, 2001     TCCN files NAIC quarterly financial statements for the period ended 6/30/01 and reports
                     negative net worth of $53.8 million.
                     F&A Deputy Commissioner acknowledges receipt of certain information.
October 2001         Draft KPMG report is issued, as well as the draft TCCN Financial Statements for
                     December 31, 2000, and 1999.
October 16, 2001     F&A Deputy Commissioner gives TCCN written confirmation that its contract with the
                     state will end October 31, 2001.
October 17, 2001     DCI issues Memorandum of Law in Support of Motion for Temporary Restraining Order



                                                     108
                    and/or Mandatory Injunctive Relief seeks an order from the court directing AmSouth
                    Bank to preserve funds in the approximate amount of $5.7 million currently held in
                    MCMC’s account and/or to return said funds to TCCN’s account.
                    DCI issues Motion for Temporary Restraining Order and/or Mandatory Injunctive Relief
                    for the same reasons as stated above.
                    Chancery Court of Davidson County issues an Order Granting Injunctive Relief. The
                    Court denies seizure before TCCN is granted a hearing, but issues a temporary restraining
                    order to avoid waste, preferential payments and liquidation of assets and to preserve the
                    status quo pending the hearing on the request for seizure. The hearing is scheduled for
                    October 18, 2001. The Court also issues an Order for Filings to be made Under Seal to
                    preserve confidentiality.
                    DCI issues Verified Petition for Appointment of Receiver for Purposes of Liquidation and
                    Injunction to appoint the Commissioner as Liquidator.
October 18, 2001    The Chancery Court of Davidson County issues an Order of Seizure of Respondent
                    TCCN; an Order Setting Hearing on Request for Liquidation or Rehabilitation; and an
                    Order Lifting Confidentiality of Filings. TCCN, MCMC, and AHS are enjoined from
                    waste or disposition of TCCN’s property, or the destruction, deletion, modification, or
                    waste of its records, databases, or computer files; enjoined from transaction of TCCN’s
                    business except with the Commissioner’s written consent, etc. Any bank, savings and
                    loan association, financial institution or other person, which has on deposit, in its
                    possession, custody, or control, any funds, accounts, and any other TCCN assets must
                    immediately transfer custody and control to the Commissioner. The Order is effective
                    until entry or denial of an order of liquidation or rehabilitation, unless otherwise ordered.
                    A hearing on the Commissioner’s Verified Petition for Liquidation is set for November 2,
                    2001.
                    MCMC, TCCN’s management company, terminates over 200 of its 300 employees.
                    Staff from the Tennessee Receivers Office begin assisting the Supervisor on-site (at the
                    office of TCCN).
October 19, 2001    Approximately 279,000 enrollees are removed from TCCN and are transferred to VSHP
                    Select.
November 1, 2001    Synertech of Harrisburg, PA, is selected to process claims under liquidation.
November 2, 2001    Chancery Court of Davidson County issues a Final Order Appointing the Commissioner
                    for Purposes of Liquidation of Respondent TCCN and a Permanent Injunction.
December 2001       The liquidator established procedures for unpaid claims liabilities. Schaller Anderson of
                    Phoenix, Arizona, is selected to assist the Special Deputy in monitoring the activities of
                    Synertech.
December 12, 2001   Commissioner submits Recommended Procedure for Evaluation of Litigation Previously
                    Instituted by TCCN Against the State and State Officials to determine the appropriate
                    disposition of litigation prior to liquidation. DCI recommends an attorney for evaluating
                    and determining whether the three pending lawsuits filed by former management of
                    TCCN should be pursued or abandoned.
January 4, 2002     Pershing and Yoakley of Knoxville, TN, are selected to review the appropriateness of
                    methods and processes of TCCN in Liquidation, to assist in the preparation of a database
                    of previously paid claims, and to prepare reports to support filings to the Chancery Court.
January 7, 2002     Informal creditors meeting is held between the Special Deputy and a staff member of
                    TCCN in Liquidation and representatives of the Tennessee Medical Association, the
                    Tennessee Hospital Association, and the Hospital Alliance of Tennessee.
March 1, 2002       The deadline for providers to file claims under the liquidation of TCCN.
Late Spring/Early   Anticipated debt establishment.
Summer 2002




                                                     109
                                      APPENDIX 6

                      Results of Prompt Pay Analyses of MCOs/BHOs
                                 January 2001-January 2002

Numbers in bold indicate noncompliance with the Prompt Pay Act.

Better Health Plans

                              Within 30 days     Within 60        Greater than 60
                                                   days                days
July 2001                        100.00%         100.00%              0.00%
October 2001                      95.93%         97.86%               2.14%
October 2001 (after review        98.83%          99.91%              0.09%
of resubmitted data)
November 2001                     96.68%          98.20%              1.80%
November 2001 (after review       99.09%          99.96%              0.04%
of initial analysis)
January 2002                      99.31%           99.99%             0.01%

John Deere Health Plans

                              Within 30 days Within 60 days       Greater than 60
                                                                       days
January 2001                     89.20%            98.20%             1.80%
April 2001                       96.82%            99.77%             0.23%
July 2001                        96.54%            99.74%             0.26%
October 2001                     98.13%            99.85%             0.15%
January 2002                     92.33%            99.77%             0.23%
JDHP Medical
January 2002                      99.00%           99.66%             0.34%
JDHP Drug

Memphis Managed Care

                              Within 30 days Within 60 days       Greater than 60
                                                                       days
January 2001                     97.10%            99.70%             0.30%
April 2001                       82.66%            99.19%             0.81%
May 2001                         80.99%            99.30%             0.70%
June 2001                        87.37%            98.93%             1.07%
July 2001                        94.39%            99.58%             0.42%
October 2001                     97.56%            99.76%             0.24%
December 2001                    95.03%            99.59%             0.41%
January 2002                     74.28%            98.81%             1.19%



                                           110
OmniCare

                               Within 30 days Within 60 days   Greater than 60
                                                                    days
January 2001                      97.30%          99.93%           0.07%
April 2001                        96.02%          99.57%           0.43%
July 2001                         96.97%          99.72%           0.28%
October 2001                      85.29%          93.32%           6.68%
November 2001                     97.99%          99.54%           0.46%
January 2002                      99.53%          99.82%           0.18%

Preferred Health Partnership

                               Within 30 days Within 60 days   Greater than 60
                                                                    days
January 2001                      95.20%          98.80%           1.20%
April 2001                        86.07%          99.78%           0.22%
May 2001                          91.22%          99.97%           0.03%
July 2001                         90.42%          99.94%           0.06%
October 2001                      95.09%         100.00%           0.00%
January 2002                      98.80%          99.93%           0.07%

Premier

                               Within 30 days    Within 60     Greater than 60
                                                   days             days
January 2001                      69.90%          99.50%           0.50%

April 2001                        84.04%          99.21%           0.79%
Fee for Service Only
April 2001                        92.84%          99.65%           0.35%
Fee for Service & Commu-
nity Mental Health Centers
(CMHC) Capitated Claims
July 2001                         73.41%          96.63%           3.37%
Fee for Service Only
July 2001                         85.66%          98.18%           1.82%
Fee for Service & CMHC
Capitated Claims
August 2001                       83.58%          94.88%           5.12%
Fee for Service Only
August 2001                       89.35%          96.68%           3.32%
Fee for Service & CMHC
Capitated Claims
September 2001                    88.41%          97.39%           2.61%
Fee for Service Only


                                           111
September 2001                   94.44%          98.75%         1.25%
Fee for Service & CMHC
Capitated Claims
October 2001                     90.45%          97.97%         2.03%
Fee for Service Only
October 2001                     95.16%          98.97%         1.03%
Fee for Service & CMHC
Capitated Claims
November 2001                    98.23%          99.96%         0.04%
Fee for Service Only
November 2001                    99.09%          99.98%         0.02%
Fee for Service & CMHC
Capitated Claims
January 2002                     97.40%          99.95%         0.05%
Fee for Service Only
January 2002                     98.51%          99.97%         0.03%
Fee for Service & CMHC
Capitated Claims

Tennessee Behavioral Health

                              Within 30 days    Within 60   Greater than 60
                                                  days           days
January 2001                     58.90%         99.30%          0.70%
April 2001                       73.09%          99.56%         0.44%
Fee for Service Only
April 2001                       87.92%          99.80%         0.20%
Fee for Service & CMHC
Capitated Claims
May 2001                         54.57%          99.10%         0.90%
Fee for Service Only
May 2001                         72.46%          99.45%         0.55%
Fee for Service & CMHC
Capitated Claims
June 2001                        67.74%          99.20%         0.80%
Fee for Service Only
June 2001                        78.30%          99.49%         0.51%
Fee for Service & CMHC
Capitated Claims
July 2001                        79.05%          96.64%         3.36%
Fee for Service Only
July 2001                        87.35%          97.97%         2.03%
Fee for Service & CMHC
Capitated Claims



                                          112
August 2001                     85.11%          93.49%         6.51%
Fee for Service Only
August 2001                     89.80%          95.54%         4.46%
Fee for Service & CMHC
Capitated Claims
September 2001                  86.73%          97.36%         2.64%
Fee for Service Only
September 2001                  93.12%          98.63%         1.37%
Fee for Service & CMHC
Capitated Claims
October 2001                    88.03%          98.32%         1.68%
Fee for Service Only
October 2001                    93.43%          99.08%         0.92%
Fee for Service & CMHC
Capitated Claims
November 2001                   96.62%          99.89%         0.11%
Fee for Service Only
November 2001                   97.92%          99.93%         0.07%
Fee for Service & CMHC
Capitated Claims
January 2002                    94.67%          99.92%         0.08%
Fee for Service Only
January 2002                    96.33%          99.94%         0.06%
Fee for Service & CMHC
Capitated Claims

Tennessee Coordinated Care Network

                      Within 30 days      Within 60 days   Greater than 60
                                                                days
January 2001              82.60%               95.70%          4.30%
April 2001                73.29%               85.58%         14.42%
May 2001                  84.68%               93.79%          6.21%
June 2001                 85.83%               95.29%          4.71%
July 2001                 86.41%               96.31%          3.87%

Universal Care

                      Within 30 days      Within 60 days   Greater than 60
                                                                days
July 2001                 99.80%               99.85%          0.15%
September 2001            52.01%               99.63%          0.37%
October 2001              60.10%               95.60%          4.40%
November 2001             77.43%               95.90%          4.10%
December 2001             61.20%               95.60%          4.40%


                                         113
January 2002                     80.38%                   90.52%           9.48%

VHP (Vanderbilt Health Plans/Victory Health Plans)

                            Within 30 days            Within 60 days   Greater than 60
                                                                            days
January 2001                     93.70%                   98.20%           1.80%
April 2001                       98.60%                   99.83%           0.17%
July 2001                        98.66%                   99.98%           0.02%
October 2001                     99.04%                   99.96%           0.04%
January 2002                     98.35%                   99.34%           0.50%

Volunteer State Health Plan

                            Within 30 days            Within 60 days   Greater than 60
                                                                            days
January 2001                     98.60%                    99.97%          0.03%
April 2001                       99.32%                    99.97%          0.03%
July 2001                        99.85%                   100.00%          0.00%
VSHP Select
July 2001                        99.35%                       99.95%       0.05%
BlueCare
October 2001                     99.31%                       99.95%       0.05%
VSHP Select
October 2001                     99.57%                       99.99%       0.01%
BlueCare
January 2002                     98.58%                       99.90%       0.10%
VSHP Select
January 2002                     99.14%                       99.78%       0.22%
BlueCare

Xantus

                            Within 30 days            Within 60 days   Greater than 60
                                                                            days
January 2001                     96.70%                   99.10%           0.90%
April 2001                       95.40%                   96.53%           3.47%
May 2001                         96.75%                   97.89%           2.11%
June 2001                        96.60%                    99.50%          0.50%
July 2001                        99.44%                    99.79%          0.21%
October 2001                     99.52%                    99.74%          0.26%
January 2002                     95.00%                   99.45%*          0.55*%
* DCI rounded these numbers to 99.5% and 0.5% respectively.




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